Date: 09/20/2021
Author: Kent Moors, Ph.D.
Late last week, Europe’s rapid spike in natural gas prices intensified. The Continent is now confronting the highest prices ever witnessed with the cost accentuated by power generation outages, reduced pipeline imports from Russia, and heat waves.
Mid-week, the October futures price at the main northern European Dutch TTF hub (the Title Transfer Facility, where a main benchmark price is also calculated) set a record and has now risen more than 270 percent since January. It is likely to become worse before it gets any better.
The problem is particularly acute in the UK, where reliance on wind power in certain regions is hampered by little wind. The UK has become particularly dependent upon renewables (especially wind power) and natural gas as it phases out coal. Yet the ability of fallback conventional power generation to offset the shortfall has been further stymied by the unexpected shutdown of a main inland facility and a fire at a French-British power link cutting imports.
The latter is at a converter station in Kent with the fire cutting out the high-voltage power cable importing electricity from the French mainland. Officials in London are privately expressing concern that the cable outage may last awhile.
In tandem, UK electricity futures prices (technically reflected in what are termed “electricity auctions”), hit unparalleled levels, with prices surging to £2,500 per MWh for peak demand hours from an average of £40 prior to the spike.
Analysts are now suggesting that the crisis could remain a continent-wide concern well into the winter heating months.
The situation is compounded by the Russian decision to withhold additional gas volume on the operating Nord Stream I pipeline for its own use at home. The second line on the Nord Stream is not yet in service and remains mired in ongoing geopolitical disagreement (primarily resulting from American pressure to prevent the parallel pipeline from opening).
In addition, the recurring storms in the US Gulf of Mexico have hampered the ability of American liquefied natural gas (LNG) exports (especially to UK and Dutch intake terminals) to offset the volume limitations coming from Russia.
And if that is not enough, severe European droughts have also cut hydropower to historic lows.
A crunch has hit a number of companies like a hammer. Danish energy investor Nordstrom Invest filed for bankruptcy last week, joining two UK energy suppliers – Pfp Energy and Moneyplus Energy – who closed their doors.
As it stands moving into this week, European power prices are in lockstep with the cost of natural gas. Most Continent observers are already saying that gas will become more expensive over the next several months, further straining the energy balance. Once the current late season heat wave subsides, the declining demand on available supply will be more than offset by the catchup necessary in stockpiling for winter.
There, the unusually cold weather patterns hitting Europe in April obliged a draw down on gas in storage. Later, temperatures moved in the other direction, further resulting in additional dips in gas storage levels. Continent-wide, the average gas volume in storage sits currently well below the pre-COVID pandemic five-year average.
In fact, the overall European gas storage picture has moved from a surplus at the beginning of 2021 to multi-decade record lows.
That combined with the ongoing demand spike has led to the accelerating rise in prices. In addition to the demand-driven pricing pressure, traders are also telling me that they expect a significant increase in power price volatility, as the cost of electivity generation vacillates from a combination of wind availability, gas importing expectations, and peak demand levels.
All of this is leading to a very nervous energy market on the other side of the pond. That Europe produces little natural gas domestically (with the exception of declining production in Norway), means the crunch must be met by increasing reliance on imports.
My contacts in electricity and natural gas trading in both Brussels and Paris are pointing toward likely future contract moves further up the curve with a brief respite later (end of fourth quarter 2021, into first quarter 2022). The market is transitioning quickly into main end user clients hedging contracts. Yet that remains a near term remedy only.
At issue is a rising likelihood that a colder European winter will result in a competition with Asia for LNG. In such a scenario, the prices for both TTF and JKM (Japan-Korea-Market) would move higher. In this event, the only way to balance markets is another appreciable rise in European natural gas and electricity prices.
Some analysts are beginning to suggest that the further price increases will also have to combine with some “demand destruction.” This is usually accomplished though rolling brown outs and black outs.
Should this situation continue into the next week, there are two short term plays I will be recommending to my Sigma Trader and PRISM Profits subscribers providing an immediate profit.
Meanwhile, if the UK gas and power problems are not enough, there is a further potential shortfall approaching. Yesterday (September 19), the CEO of the UK Food and Drink Federation Ian Wright cautioned that the energy crisis has combined with a post-Brexit labor crunch into a spiraling caron dioxide supply decline.
Wright warns that, unless the British government immediately intervenes to subsidize both the price and supply of electricity, the availability of CO2 will be cut. That will lead to a collapse in poultry availability as the end of the year approaches. “Cancel Christmas,” Wright dramatically added.
Somebody better advise Bob Cratchit that the goose from Scrooge may not arrive after all.
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
After moving through the inner circles of royalty, oligarchs, billionaires, and the uber-rich, he discovered some of the most important secrets regarding finance, geo-politics, and business. As a result, he built one of the most impressive rolodexes in the world. His insights and network of contacts took him from a Vietnam veteran to becoming one of the globe’s most sought after consultants, with clients including six of the largest energy companies and the United States government.
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