European gas prices broke yet another record last week, driven by the anticipation of production outages in Norway, lower nuclear energy production in France, and, of course, Gazprom's planned shutdown of Nord Stream 1 for three days beginning on Wednesday.
Benchmark prices in the Netherlands hit close to 316 euros per megawatt-hour earlier this week, which is equivalent to about $315 per MWh. In addition to the Nord Stream news, planned gas field maintenance in Norway also contributed to the latest price spike, as did news of planned outages at export terminals.
Citi analysts this week forecast UK inflation could reach 18.6 percent by January as energy costs continue up inexorably. These costs prompted several energy executives this week to warn of social unrest in the country.
French President Emmanuel Macron, meanwhile, dropped a bomb in his first speech after the government's summer break, saying France has come to the end of the "era of abundance," warning that hard times were ahead and blaming them on climate change and Russian President Vladimir Putin.
"What we are currently living through is a kind of major tipping point or a great upheaval … we are living the end of what could have seemed an era of abundance … the end of the abundance of products of technologies that seemed always available … the end of the abundance of land and materials including water," Macron said, as quoted by The Guardian this week.
France has been suffering greatly reduced nuclear output, on which the country depends for most of its energy consumption and which it also exports. With about half of its reactors down, France has resorted to electricity imports from Germany. And then there have been droughts, which Macron referenced in his speech.
Droughts have indeed taken an additional toll on Europe, affecting hydropower production in large producers such as France and Norway and consequently fueling the price rise in fossil fuels utilities have to lean back on in times of lower hydropower production.
In Germany, droughts interfered with oil and coal supply to utilities as the level of the Rhine remained too low for many vessels to reach the storage sites and power plants where the coal and oil will be needed this autumn and winter.
"Due to very reduced domestic shipping, accumulated coal stocks could quickly fall," a document produced by the German economy ministry and cited by Reuters, said. "Additional storage sites which have been and are being procured in southern Germany will probably not be filled by winter," it warned.
Meanwhile, Chancellor Scholz returned from Canada without a commitment of more LNG supply as Ottawa demonstrated it would much rather partner with Germany on hydrogen, which is touted as the cleaner alternative to natural gas that will dominate the market after the transition.
In fairness, even if Canada had made a commitment to supply Germany with LNG, it would not have come soon enough to secure supply for this winter. Yet it would have alleviated fears for the future as Belgium's Prime Minister warned Europe was looking at not one but rather five to ten difficult winters ahead.
"The key is energy, energy, energy. There is an energy crisis, let's be honest about that, electricity prices are 10 times pre-COVID levels, that is a shock to the system," Thomas Costerg, a senior analyst at Pictet Wealth Management, told Reuters this week.
Since the start of the year, gas prices have surged by close to 30 percent, with the August gain alone at 40 percent. This has, of course, pushed electricity prices higher, too, with national day-ahead averages breaking all-time records and adding to mounting pressure on governments to find a way to avert the worse of the crisis.
Expectations are not very high, however. Recession is a word that is being used increasingly frequently with regard to the immediate future of Europe as energy prices continue to fuel inflation that seems to be getting less and less manageable.
The only good news so far is that European gas storage is filling up ahead of schedule, so there will be some gas in case Gazprom decides to leave Nord Stream 1 shut. According to analysts, however, this will only postpone the worst of the crisis rather than avert it.
Morgan Stanley delivered that last warning, saying that "If Nord Stream 1 flows fall to zero, this winter's inventories should also still be manageable," but adding that “if those flows don't recover, the accumulating loss next year would then create an exceptionally tight winter 2023/24," in a note cited by MarketWatch.
It does look like the age of abundance that much of Europe had enjoyed for a couple of generations is coming to an end.
In his speech, Macron said that he would prioritize the energy transition this autumn instead of finding ways to make energy prices more manageable for the millions of Frenchmen struggling to pay their bills. If those bills keep climbing, then the UK might not be the only country facing civil unrest.
By Irina Slav for Oilprice.com