Coal prices hit a record as utilities burn the fuel to fill in gaps left by reduced gas supply from Russia
European energy prices are surging as a scorching summer boosts demand while natural gas supplies from Russia remain limited. The focus is also shifting to how the region will withstand winter demand shocks.
Coal prices soared to a record as utilities increasingly burn the fuel to fill in gaps left by reduced supply of gas from Moscow. Benchmark gas futures gyrated wildly, gaining as much as 5.1% after settling close to a record high on Tuesday.
Europe is engulfed in an energy crisis fanned by Russia’s war in Ukraine, a climate emergency on one of its key rivers and recovery from the global pandemic. Businesses and households are facing the worst inflation in decades and the risk of recession, while governments are stepping back from their clean-energy goals just to ensure that there is enough fuel to make it through the coming winter.
Surging energy prices mean “we are going to see some steep contraction in the European economies”, Amrita Sen, director of research and co-founder of London consultancy Energy Aspects, said. Even though many industries are rationing gas and switching to alternatives where possible, the burden of high prices is “huge”, she said.
The Rhine river has dropped to historically low levels amid hot and dry weather, hindering the transport of energy commodities including coal. There may be some relief, however, as the water at a key chokepoint is set to rise above a critical level in the coming days.
German utility Uniper, which reported a net loss of €12bn on Wednesday, has previously warned that it may not have enough coal to run its power plants in full if the Rhine water crisis worsens.
“In Europe, the scramble for gas alternatives is keeping coal buoyant” and Dutch gas prices above the €200 level, said Christopher Ward, senior energy broker at Britannia Global Markets. “Demand woes and recession fears continue to permeate throughout the market.”
The concerns are being partially countered by storage sites across the region continuing to be replenished in line with the five-year average. European inventories are 75% full, and Germany has reached an intermediate refill target two weeks ahead of schedule. But the country’s energy regulator warned that stockpiles would last only two-and-a-half months if Russia cuts off supply completely.
High liquefied natural gas (LNG) imports into Europe are helping fill storage, but even that is now becoming more expensive as Asian importers are buying more aggressively to meet their own demand and to stockpile for winter.
Front-month futures at the Dutch hub, the European benchmark, were 1.3% higher at €228.80/MWh by 3.54pm in Amsterdam, after falling as much as 2.6% earlier. The equivalent contract in the UK rose 1.7%.
German year-ahead benchmark power fluctuated above €500/MWh. Prices are about six times higher than this time last year.
Germany, Europe’s largest economy, has taken one of the biggest hits from the energy crisis due to its traditionally heavy dependence on Russian supplies. The government has urged lower consumption, warned of rationing and this week slapped a levy on gas use. It’s also rushing to set up floating terminals to import LNG.
The casualties are piling up. Uniper, which was rescued with a government bailout last month, expects negative earnings for the full-year as the company struggles to fill supply gaps left by Russia. Trafigura Group’s Nyrstar announced this week that it would halt production in one of Europe’s biggest zinc smelters following the energy crisis. Others producing everything from fertilisers to aluminium have also been hit.
Bloomberg News
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