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Market commentary

January 2022

Last year ended with many extremes. For example, for the first time since 2010, there was no hour with negative electricity prices during the Christmas period. Or the German nuclear power plants Gundremmingen C, Grohnde and Brokdorf ran until the last permitted second in the old year.

Since I started working in energy trading in 1998, a situation like the one we are currently facing was unthinkable. There is an energy shortage in Europe and the prices show this. Energy prices that are multiple times the full costs, over a longer period are clear signals of scarcity. These extremes have many causes. Some of them are quite “normal”: in Serbia it snowed heavily in mid-December and coupled with insufficient coal stocks, the failure of the two largest coal-fired power plants caused the demand for imports and thus the electricity price to explode there as well. The cold spring throughout Europe and the low yield from renewable energies in the West have contributed to the prices skyrocketing, as has the global competition with Asia for LNG. The extreme prices there have been the basis for the price increase in Europe in Q4 2021.

Yes, electricity is “only” a derivative of gas/coal and CO2. Therefore, the price for electricity has risen in all European markets with the high gas prices, which have pulled coal prices along with them.

What’s next? The high prices are a strong incentive for additional supply. At an unbelievable 187 EUR/MWh for gas on the spot market, the LNG tankers turned back to Europe shortly before Christ-mas. In December, an average of 1.6 TWh/day of gas from LNG reached Europe. Unfortunately, we need about 10 TWh/day. So, LNG is able to cap price peaks, but cannot secure the supply permanent-ly. Norway does what it can and supplies about 3 TWh/day and Russia mostly manages 3 to 3.5 TWh/day. With cold weather, however, and especially considering the insufficient storage level, this supply may not be enough for us. Maybe. That is why the prices are so high.

Just before Christmas, Mr Putin said that the shutdown of the Yamal pipeline, which runs through Poland, is happening because of a lack of orders. “What are we going to transport?” said Putin. And while one could of course hope for Russian gas to come, this is actually very naïve from a European perspective. Putin claims that Europe does not want to buy any more Russian gas at the current high prices and thus little additional gas is flowing. He ac-cuses Ukraine (Naftogaz) of lying. Unfortunately, from the energy industry point of view, Russia is a black box, and it is not known who in Russia has what kind of agreement with European players. However, the many arbitration proceedings against Gazprom about ten years ago indicate that Putin’s statements are correct in one essential point: Europe has largely abandoned the old oil price link for gas deliveries. And is relying on market pricing at the European hubs.

This is very short-sighted, because we cannot market our own volumes at these hubs, but only oper-ate trading points (THE, TTF, CEGH) for non-EU gas. And since Europe is dependent on Russia if we want to get cheaper gas than from the “Asian LNG world market”, we have no alternatives when it comes to pricing.

So, it will continue as before: we hope for warm weather and a better supply of renewable energy, so we do not have to produce electricity from gas- and coal-fired power plants (Don’t look up!). However, this is becoming increasingly difficult as Europe is leaning towards shutting down conven-tional power plants. Germany’s nuclear phase-out is the culmination of this transformation, if you want to give a prize for the most counterproductive behaviour in energy terms. Nevertheless, gas and electricity are becoming cheaper again, simply because such abnormally high prices influence both supply and demand.
And therefore, we expect prices to ease from now on, even though there may still be turbulences throughout the year. With a low probability in our view, a further escalation is also conceivable. From the global conflicts (Taiwan, Ukraine, Middle East) to unpredictable Turkey, which is also not unim-portant for Europe’s gas transport, not all possible negative events have occurred yet. But we expect climate change to do its job and reduce consumption in winter. At least on average.

All the best for the New Year 2022.

Felix Diwok, CEO, for the Inercomp Team

PS: If you want to see a very political yet humorous contribution to the further development of the world’s political decision-making system, I recommend “Don’t look up” on Netflix with Leonardo Di-Caprio, Meryl Streep and Jennifer Lawrence. This is how we solve every global crisis!

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