Javier Blas: Europe's gas crisis is worse than it looks

It’s not just companies paying the price of the European gas-price curve repricing at a much higher level compared with March. Consumers are also suffering.

European natural gas prices are still well below the all-time high set in March. Dig a bit deeper, however, and they are signaling a more protracted disruption than markets anticipated in the immediate aftermath of Vladimir Putin’s invasion of Ukraine.

While the gas market then priced in a short-lived crisis, lasting perhaps a couple of months, it’s now flashing extreme danger for next winter, through 2023 and, increasingly, into 2024. Over the last few days, the whole European gas price curve has repriced at a much higher level.

The shift in the forward curve has been the most notable development of the gas market in the past month — one that’s not gathering enough attention in European capitals.

But industry is keenly aware, as it’s bearing the cost. Back in March, a German manufacturer could lock in gas prices for all of 2023 at about €80 per megawatt hour; now, it has to pay a record high €145 to hedge the same price risk.

The whole European gas-price curve has repriced at a much higher level compared with the level it traded in March. It’s not just companies paying the price. 

Electric Ireland confirmed it is putting up its unit prices by 11.35% for electricity and 31.9% for gas from next month, less than three months after its last price rise in May.

The increases, which have been blamed on the war in Ukraine, will add €164.55 to the average annual electricity bill and €311.54 on to its average customer’s annual gas bill. The increases will affect 1.1 million electricity customers of the State-owned company, and 145,000 gas customers.

It means bills for the average customer with both a gas and electricity contract will rise by €1,000 annually - with more hikes on the way.

Last week, the closely watched Dutch TTF contract, a European spot benchmark, rose to about €175, doubling in a month, after Russia cut supplies via the Nord Stream 1 pipeline into Germany. 

Even so, spot gas prices remain 30% below the record high settlement of €227 set during the early days of the war — worrying, but not alarming; prices are high, but not that high. After what the market weathered in March, one can understand why policy makers aren’t panicking.

Despite a big rally so far in July, spot European gas prices remain 30% below the record high set during the early days of the Russian invasion of Ukraine But that’s if you ignore the action on the back end of the curve. 

On March 5 — when spot gas prices surged to about €185 — the contract for delivery in December 2022 rose only to about €155; last week, when the spot price was slightly lower, the December contract traded at nearly €195.

A year into Russia manipulating European gas supplies, the market is finally convinced that Moscow will continue to do so, and perhaps with greater intensity.

Nord Stream 1

The first test comes in the next two weeks. The Nord Stream 1 pipeline, the most important gas link between Russia and the European Union, undergoes annual maintenance from July 11 to July 21. 

Berlin fears that Moscow will find an excuse to keep it closed for good, cutting gas supplies to Germany completely. After all that Moscow has done, the German government is right to be concerned.

Yet, Russia may want to keep some gas flowing to preserve its long-term leverage. From a game-theory point of view, that makes sense. Once Russia stops shipments completely, it can no longer apply pressure. Tactically, Moscow is likely to keep some gas moving, retaining the option of cutting or slowing flows whenever it chooses.

The Nord Stream 1 pipeline will undergo annual maintenance from July 11 to July 21. Berlin fears that Moscow will find an excuse to keep it closed for good, cutting gas supplies to Germany completely. File photo: Stefan Sauer/dpa via AP

Moreover, Nord Stream 1 is the main route for Russian gas into Europe indexed against the TTF contract, according to Goldman Sachs. Not reopening the pipeline after the maintenance shutdown will limit the profit that Gazprom, the Russian state-owned gas giant, enjoys from sky-high gas prices.

Russia has clearly written off its gas relationship with Europe. For now, however, the Kremlin will continue to enjoy the best of both worlds: high revenue and compelling leverage. To achieve its objectives, Russia needs to continue selling some gas into Germany, but at reduced rates, as it’s currently doing.

The market is right to reprice the gas curve; the only question is why it took so long. There’s further risk ahead: At some point, Moscow will completely turn off the tap, probably just before the winter, to try to bring the German economy to its knees. 

That’s an outcome the market hasn’t priced yet.

• Javier Blas is a Bloomberg Opinion columnist covering energy and commodities