Mitchell Jennings, Senior Analyst at Sova Capital, answers five questions on spiking European gas prices as corporates and policy makers seek to effect a transition to cleaner generation.
1. Why do EU energy prices continue to rise? What happened?
There are several factors that led to the current situation. These include underground gas storage levels in Europe being at multi-year lows, high gas prices in Asia keeping that market more attractive for LNG, and probably Russia prioritizing filling its underground storage before Europe. It’s hard to say if we are at the peak for energy prices, specifically natural gas, but high prices seem likely in the near- to mid-term. That said, Russian gas exports were down just 5% in 1H21 vs. the record gas year of 2018.
2. Will it last? Will gas shortages get filled?
Likely in November, after Russian storage levels are filled to required levels, we could see an increase in exports to Europe, but the increase may not be that big. The market could remain in deficit throughout winter, and focus may turn to correcting this before the next heating season.
3. Is this a COVID thing or have investment cuts by oil companies “in transition” already started to show?
Currently it looks like if oil prices rise again on the back of a lack of production, it is more due to underinvestment related to the pandemic and the demand outlook earlier this year. The transition has played a part in the increase in gas prices, as there is a significant reliability now on renewables, that have been operating under expected capacity, i.e., wind in the UK.
4. What companies have benefitted or may continue to benefit from the current price trends?
Clearly Gazprom and Novatek are beneficiaries here. Just looking at their share price movement tells you this, but also expectations for their financials going forward look strong. From what we are seeing, similar dynamics are’t noticeable in some of the global majors, which is likely due to oil trading rather range-bound as of late.
5. Where are renewables in this? What does the current situation say about the future relationship between natural gas and renewables?
As mentioned above, renewables were expected to produce more than they have been recently. The WSJ reported that UK windfarms produced less than 1GW on some days, while installed capacity is 24GW. To offset the underperformance, traditionally natural gas is used, but prices were already inflated due to the underground storage issue,. And while coal historically would pick up some of the slack, it was not able to do so due to high carbon prices, which led gas to become even more in demand. This could just be the “perfect storm” or it could be a warning to the EU that backup measures outside of renewables will be required for some time.
