EU Energy Crisis : Tensions are mounting ahead of key summit
Head of Macro Analysis
Summary: Tensions are mounting in the energy front today. The European natural gas futures jumped 35 % this morning as Russia kept Nord Stream 1 link shut.
Over the weekend, several EU member countries announced measures to mitigate the impact of the crisis (€65bn anti-inflation plan in Germany, €23bn liquidity support to energy producers in Sweden, for instance). This is only the beginning. EU countries will have no other choice but to go big this winter to avoid a full-scale recession which could potentially cause a financial crisis.
Prices continue to jump : Volatility and the lack of liquidity are among the two main issues in the European energy market, at the moment. This morning, European natural gas futures surged as much as 35 % after Russia halted the Nord Stream pipeline to Europe indefinitely. This is happening ahead of a key EU emergency energy meeting scheduled for 9 September. According to the Financial Times, Russia is likely to stop supply via Nord Stream 1 as long as European sanctions remain in place. This is yet to be confirmed officially. Russia is still supplying the EU with gas via Belarus and Ukraine. But the quantities are marginal. This nightmare scenario (Russia cutting off gas) was expected. That’s why the EU speeded up gas imports over the summer, especially importing massively liquefied natural gas from the United States. Gas storage is now at 80 %. But this is not enough. On average, gas storage was around 82 % in the EU on 31 August. We need to reach the target of 90 % to be able to provide a buffer for peak demand in winter months. In winter, electricity demand usually doubles in most countries (from 45 MWH per day to 90 MWh per day in France, for instance). We are not in a safe area yet. High prices are another issue. We are now approaching €300 per MWh for natural gas in the EU for all winter. Households and industries will be crushed by these high energy prices for such a long time, unless governments decide new measures to accommodate them. This is happening, fortunately.
Go big or go away : Over the weekend, several EU governments have unveiled new measures to cope with the energy crisis. Energy utilities and producers are facing massive margin calls – with a few companies at risk of liquidity crisis (Germany’s Uniper and two Vienna municipal utilities, for instance). To prevent such a scenario, the Swedish government has announced a €23bn liquidity backstop for utilities. The scheme is operational from today onwards. It will stay in place as long as needed. The guarantees are designed to help companies struggling to meet the surging collateral requirements needed to trade electricity. It will bring more liquidity to the market too. Over the weekend, the Finnish government confirmed that it is planning to implement similar guarantees. It could actually be reproduced all across the EU if EU energy ministers decide so at this week’s emergency meeting. In addition, Germany presented its third anti-inflation plan for about €65bn – this is much more than the two previous plans combined. This includes several measures which could be introduced by other EU countries : a tax on superprofits (we expect France and the United Kingdom to follow this path soon), €300 subsidy to retirees distributed at the end of this month, checks to students and a reform of the housing allowance which benefit to about 3 million people versus 700,000 as of today All the European governments have well-understood that the energy crisis could generate social tensions in the most affected countries and, potentially, trigger a financial crisis (thus, the need to provide liquidity to the energy market).
Key focal points at this week’s EU energy meeting : According to Reuters, the EU energy ministers will try to find an agreement on a gas price cap and on providing companies facing high margin calls emergency liquidity support (the Swedish scheme will probably be reproduced in other countries). The ministers will also focus on reforming more deeply the European electricity market. Two main options are on the table : the ‘Iberian exception’ and the Greek non-paper (for a more detailed analysis of the challenges of this week’s meeting, see EU Emergency Energy Meeting : A Never Ending Story, 31 August 2022).
My colleague Ole S. Hansen will publish a more detailed update on the EU gas and power prices. Don’t miss it HERE.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.