In a Capital Letter last month, I looked at a brief plunge in European natural-gas prices (for a moment they even turned negative) and concluded that there was not too much to be read either into that blip or the relatively low prices the continent was seeing:
Europe’s energy crunch has not gone away. Today’s unseasonably warm weather and good levels of wind power will not last forever, and gas is still trading at around €108 ($108) per megawatt hour (based on the Dutch TTF benchmark). That’s slightly more than twice where it was at the beginning of October, 2021— a time when prices had already been surging thanks in part to post-pandemic disruptions and some early Russian game-playing.
The European price (based on the TTF benchmark) has picked up a bit since then (to around €125 per megawatt hour, admittedly still a number well below levels a few months before), but most of the anxiety for now has rightly been focused on the outlook for next (2023-24) winter rather than this one.
That said, even outside Ukraine (now the victim of energy war at its crudest: the Russians are destroying its utilities), there are still grounds for concern this winter.
Some Russian gas has continued to flow through to Europe via Turkey and Ukraine. But, as highlighted by Ambrose Evans-Pritchard, writing in the Daily Telegraph, that may be changing:
On Tuesday, the Kremlin started to cut off the remaining gas flows to southern Europe via Moldova.
I wouldn’t overstate the implications of that. While gas to Moldova goes via Ukraine, Moscow can be expected to keep TurkStream (a pipeline that does not go through Ukraine) open, given that it is unlikely to want to risk alienating Ankara (apart from anything else, Turkey has yet to approve Swedish and Finnish membership of NATO). Moreover, Russian gas reaches Hungary via TurkStream (and Serbia). Russia will wish to keep that, uh, incentive alive as Hungary is, among other matters, the other NATO holdout on Sweden and Finland. Meanwhile, Italy, another previous (indirect) recipient of gas through TurkStream, has largely eliminated its reliance on Russian gas, at least for this winter. Greece and Bulgaria are also considerably less vulnerable than they were, and Romania is close to self-sufficient.
But what about oil?
AEP:
Nor should we assume that oil supplies are safe. Putin will retaliate in some way against Europe’s embargo on Russian crude exports starting on December 6, either by withholding supply or by sabotaging such targets as the electric pumping station on the Druzhba pipeline to Hungary, Slovakia, and the Czech Republic.
These landlocked states were given an exemption on the embargo because they have no other sources of oil. “We could be looking at a multimillion-barrel shortage after December 6. It is not clear whether it is even possible to reroute enough barrels to Europe,” she said.
Again, I doubt if Putin will wish to antagonize Hungary.
Then again:
JP Morgan says Russia could give us a nasty surprise by cutting oil output by three millions barrels a day (3pc of world supply), which is physically possible without damaging its own drilling infrastructure. This would drive prices to an all-time high of $190.
If Putin went for the jugular with a five million cut, prices could reach $380 a barrel. China and India would be unhappy, but they stiffed Russia at the G20.
Putin warned at the St Petersburg Economic Forum this year that European sanctions would have “catastrophic consequences on the global energy market”.
On this at least, we should take him at his word. He left no doubt that his objective is to drive commodity costs to levels that destabilise democracies and cause a “system-wide decline” of the European economy…
Russia has a trade surplus of 20pc of GDP and an ample war chest. It can ride out months of restricted exports. Can Europe last as long?
Once again, Russia is more constrained than it seems. It’s highly unlikely that Russia will want to antagonize India or will wish to risk irritating China, a country to which it is now unhealthily beholden (it’s not easy being a vassal state). Equally, OPEC has some capacity to increase production: It does not want to see the demand destruction that would follow from $380, or even $190 oil. Even so the fact that these numbers are even being talked about only underlines the irresponsibility of the Biden administration’s (negative) attitude to domestic oil production.
Meanwhile:
These are dangerous circumstances for Britain. It has outsourced most of its gas storage to Germany and Holland, or indirectly through the LNG markets. Neither forms of back-up can guarantee energy security in a sustained crisis.
The Government has reopened the Rough storage site but this is just a fifth full so far. Nor is it enough. This country has onshore salt caverns and disused gas wells in the North Sea. Either could be exploited for strategic storage in time for next winter. It is not happening.
The net-zero Tories are again reminding us that they have zero clue.
Across the English Channel, some in the EU’s leadership have been boasting about how well the bloc’s more carbon-intensive industries are adjusting to more expensive, less easily available energy, an unconvincing claim.
AEP:
German industry cut its gas consumption by 27pc in October. This is an impressive display of national will but the longer it goes on, the greater the existential threat to Deutschland Inc. The German chambers of commerce and industry (DIHK) says that a quarter of the chemicals sector is either cutting production or shifting output abroad.
Europe has become a net importer of chemicals for the first time in the modern era. Cheap US shale gas – trapped inside the US market by lack of LNG export terminals – gives the US an unbeatable edge in petrochemicals, fertilisers, or glass.
Eurometaux says aluminium and zinc production in Europe has halved. Ten smelters have either closed or slashed output, and once they close there is no clear business case to reopen them…