European Energy Crisis: 4 Reasons You MUST Know!
European households are facing rising prices on many goods and services, but one particular standout is electricity and gas bills.
According to Bank of America, European household gas bills are expected to rise to €1,850 in 2022 from €1,200 in 2020 (an ~55% increase).
Natural gas prices have pulled back from the December peak. However, it remained high and it could get worse over the remainder of the winter months.
European Gas Prices ChartReasons for the energy crisis are not entirely straightforward as the global energy market is interconnected and quite complex.
However, below we outline some of the key issues:
A. Europe reliant on Gas Imports as Domestic Production
Europe is increasingly reliant on gas imports as domestic production, in countries such as the Netherlands, has declined.
According to the International Energy Agency (IEA), underground storage remains the principal source of short-term flexibility for gas markets in Europe.
However, lower than average inventory levels (around 50% full as of early January, compared with an average of nearly 70% for this time of the year over the past decade) create further security of supply concerns, especially in the event of late winter cold spells.
This is why uncertainty over prices and supply remains high in early January with most of the heating season still to come.
European Natural Gas Storage ChartB. Robust Rebound in Demand- Especially in Asia Taking Supply
More than half the increase in demand to 2024 is expected to come from the Asia Pacific Region. Driven by China and India as well as by emerging markets in South and Southeast Asia.
Competition for liquified natural gas (LNG) cargos from Asia have also been a driver in providing less flexibility for supplies in Europe.
Source: IEAC. Other Energy Sources not Producing Enough
Adding to the energy crunch was less electricity being produced across the European bloc due to lower wind speeds than usual.
The largest producing countries, Britain, Germany, and Denmark harnessed just 14% of total capacity in the third quarter of 2021. This was down from 20-25% in previous years (Source: Refinitiv).
This low production of wind sourced energy was compounded by France’s largest electricity supplier, EDF, taking additional nuclear reactors offline for maintenance issues.
Reuters reported French power giant EDF (EDF.PA) said it had found faults on pipes in a safety system at its Civaux nuclear power station, and it would shut down another plant because it used the same kind of reactors.
D. Russia provides ~40% of Europe’s Natural Gas
Greatly exacerbating lower storage levels and reduced energy from renewable sources, higher natural gas prices could all boil down to geopolitics.
Per a recent report from the EIA, European gas markets have strong elements of ‘artificial tightness’, which appears to be due to the behavior of Russia’s state-controlled gas supplier (Gazprom).
Unlike other pipeline suppliers – such as Algeria, Azerbaijan, and Norway –Russia has reduced its exports to Europe by 25% in the fourth quarter of 2021 compared with the same period in 2020 – and by 22% compared with its 2019 levels.
And this is despite the exceptionally high market prices for natural gas that we have seen in recent months.
The EIA further states, “Against today’s low baseline, we estimate that Russia could increase deliveries to Europe by at least one-third, or over 3 billion cubic meters per month.
This equates to almost 10% of the European Union’s average monthly gas consumption. This would be the equivalent of a new LNG tanker delivering a full cargo of natural gas to Europe every day.
Together with the current high level of LNG inflow, this would provide significant relief to European gas markets”.
And according to Brooking’s report, Russia denies restricting supplies to Europe.
But Putin taunts the EU for bringing supply volatility on itself. If only German regulators approved the Nord Stream 2 pipeline, Russian gas would again flow abundantly to Europe, Putin suggests.
Moreover, the worst part is that the Russia-Ukraine crisis could lead to even higher prices.
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The growing tensions could keep prices high for an extended period and even lead to higher prices in the coming months.
The US is discussing harsh sanctions against Russia in an effort to deter an invasion of Russian troops into Ukraine.
Moreover, the hope is that the threat of these sanctions will be enough.
The sanctions on the table for discussion include targeting individuals and companies. Also sweeping sanctions such as cutting Russia off of the SWIFT system, which would remove Russia’s financial institutions from the global financial network.
And directly related to the natural gas crisis a proposed target for sanctions is the Nord Stream 2 gas pipeline.
Nord Stream 2 gas pipeline, when operational would double the amount of natural gas moved from Russia to Germany through the Baltic Sea. This is likely to reduce the need for other pipelines, such as the Urengoy–Pomary–Uzhhorod pipeline that runs through Ukraine (CNBC.com).
The US Senate voted down a proposal for automatic sanctions against Nord Stream 2 operators. However, there could still be sanctions imposed by the US and/or Germany.
Conclusion
Low wind speeds, limited on- and off-shore production, and geopolitics have driven European natural gas prices to record levels because energy demands must be met, especially during winter.
In December, European consumers were paying 15 times for natural gas compared to those in the U.S.
Much will also depend on how low temperatures drop in Europe over the coming weeks.
From The Trading Desk
Market Update
It has been a bumpy start to 2022 for equity markets with some key important levels taken out.
The Nasdaq composite index closed below its 200-day-moving average for the first time in 439 trading sessions, a long-term trendline that has been in place since April 2020 has been taken out.
The S&P 500 closed yesterday at 4577, falling below its 100-day moving average and an important physiological support level at 4600.
Falling below this important level brings the 200-day moving average trend line into focus.
The small-cap Russell 2000 did not fare much better with key support levels taken out and down over 8% so far this year.
The backdrop to all this is rising global inflation.
UK annual inflation rose more than expected, advancing 5.4% in December, the highest reading since 1992.
Germany’s & Canada’s inflation also rose to the highest in 30 years. Higher inflation numbers are adding to the risk off sentiment in the marketplace, with the markets starting to price in potential more rate hikes than currently forecasted by the central banks.
The FOMC meet next week and we expect Powell to set the table for multiple interest rate hikes this year.
There is also increased concern about what is happening with Russia and Ukraine.
All this is a perfect mix for precious metal prices.
On the back of all this. Gold rose $30 to $1842 and Silver surged more than 3% to $24.15.
What is worth taking note of is, Gold and Silver had been consolidating nicely in 2022 and have been able to make these gains and hold on to them given the persistent strength in US Treasury yields, with the 10 Year now at 1.87%.
GoldCore has had a great start to 2022, we continue to see clients looking to protect themselves against the systemic risks that are out there. We have excellent availability on all coins and bars currently.
Please call our trading desk with any questions that you may have.
Stock Update
Gold Offer Zurich – We have a very limited number of Gold 1kg bars for Storage in Zurich & Singapore at Spot plus 1.25%. Please contact our trading desk to avail of this offer.
Excellent stock and availability on all Gold coins and bars with 1oz bars at a very competitive 3.75% over Spot and Gold Philharmonics starting at 4.5% over Spot.
Silver coins are now available for delivery or storage in Ireland and the EU with the lowest premium in the market. Starting as low as Spot plus 32% for Silver Britannia’s
Silver Britannia’s for UK delivery or storage are still available at the lowest premium in the market. This includes VAT at 20%. These can now be purchased online.
Silver 100oz and 1000oz bars are also available VAT-free in Zurich starting at 8% for the 1000oz bars and 12.5% for the 100oz bars.
Please see below our extended trading hours.
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
19-01-2022 1817.50 1826.95 1334.23 1339.34 1602.13 1610.46
18-01-2022 1810.80 1817.25 1329.13 1338.04 1589.16 1599.54
17-01-2022 1820.05 1817.85 1330.64 1331.39 1594.00 1594.25
14-01-2022 1822.25 1822.95 1327.14 1332.58 1590.28 1595.45
13-01-2022 1822.40 1820.35 1326.34 1324.67 1589.50 1587.16
12-01-2022 1816.40 1821.40 1333.24 1330.53 1598.80 1594.82
11-01-2022 1805.20 1806.80 1327.36 1330.53 1593.63 1595.22
10-01-2022 1800.55 1794.20 1324.66 1325.38 1589.35 1588.41
07-01-2022 1792.20 1792.60 1322.82 1321.50 1584.30 1581.79
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