EU Gas Prices Prices Hit Record High as Russia Curbs Supply During Freezing Winter

EU Gas Prices Prices Hit Record High as Russia Curbs Supply During Freezing Winter
A crane transports a pipe in a production hall at the Nord Stream 2 facility at Mukran on Ruegen Island in Sassnitz, Germany, on Oct. 19, 2017. (Carsten Koall/Getty Images)
Naveen Athrappully

European gas prices touched an all-time high when gas flow from Russia reversed course as freezing winter weather set in over the continent, and renewable sources, such as wind, have failed to generate reasonable amounts of power.

The benchmark price for Europe at the Dutch Title Transfer Facility (TTF) is at a record 162.78 euros per megawatt-hour, showing an increase of 11 percent on Dec. 21. Natural gas flows on the Yamal-Europe pipeline have been declining, from a Dec. 16 average of 12,000,000 kilowatt hours to almost 1,200,000 kilowatt hours on Dec. 18, before halting completely on Dec. 21. Then the flow reversed toward Poland from Germany, according to German operator Gascade.

Ole Hansen, head of commodity strategy at Saxo Bank, wrote on Twitter: “EU gas and power open higher again today with gas flows from Russia on the Yamal-Europe pipeline dropping to near zero. Just as German wind output falls to a five-week low and freezing temperatures spread across Europe.”

Russian state-owned Gazprom, the largest supplier of natural gas to Europe, sends gas via several routes and books extra volumes, based on demand, through auctions. The delivery is then routed through Ukraine, and through the Yamal route, via Belarus, to Germany.

As winter has begun to take hold, Russia has reserved more gas for domestic usage, while Gazprom hasn't booked additional deliveries at auctions. Traders closely monitor every tender, and each time Gazprom fails to book an auction for additional capacity, Europe’s benchmark gas price rises.

Starting this week, Gazprom has begun lifting gas from Central Russian underground facilities. Consumption is expected to peak in a month.

“These exciting times will continue for a bit longer and will probably not end before the winter ends,” said Hans van Cleef, a senior energy economist at ABN Amro, cited by Rigzone. “Depending on how much inventories will be left by then, the price effects of current shortages could last even much longer.”

According to some European Union officials and analysts, Russia is maintaining low supply in order to pressure the EU into approving the Nord Stream 2 gas pipeline. Nord Stream 2 allows Russia to pump gas directly into countries such as Germany without depending on intermediaries such as Ukraine and Belarus. Russia has denied the allegations.

“This is a purely commercial situation. You have to ask Gazprom about the details,” Kremlin spokesman Dmitry Peskov said on Dec. 21.

Lying on the bed of the Baltic Sea, the twin Nord Stream 2 pipelines, both running 1,234 kilometers (767 miles), have a total capacity of 55 billion cubic meters.

Western nations consider the new pipeline as leverage on Russia in negotiations related to the troop buildup on the Ukraine border.

“That pipeline ... doesn’t have any gas flowing through it right now,” U.S. Secretary of State Antony Blinken told NBC's "Meet the Press" on Dec. 12. “And, in fact, it’s a source of leverage on Russia, because to the extent President [Vladimir] Putin wants to see gas flowing through that pipeline, if and when it becomes operational, it’s very unlikely or hard to see that happening if Russia has renewed its aggression on Ukraine.”

Freezing temperatures have disrupted renewable energy production as wind output in Germany registered a dismal 2,277 megawatts on Dec. 21. Based on broker data, German power traded at 420 euros per megawatt-hour.