European Gas Prices Leap at Open After Russia Shuts Nord Stream Pipeline

© Reuters.

By Geoffrey Smith

Investing.com -- European natural gas futures leaped at the opening on Monday, after Russian gas monopoly Gazprom (MCX:GAZP) shut down the Nord Stream pipeline to Germany, raising fears of a total shutdown of Russian supplies over the winter.

The front-month Dutch TTF contract, which serves as a benchmark for northwest Europe, leaped as much as 31% before retracing a little to trade at 263 euros a megawatt-hour by 03:25 ET (07:25 GMT). That's a gain of 22.5% from Friday's close.

Gazprom's action was the second in a major escalation in the economic struggle sparked by Russia's invasion of Ukraine on Friday. The company had released its news immediately after the close of trading in natural gas in Europe, and only a matter of hours after G-7 finance ministers had agreed on a long-mooted plan to impose a price cap on Russian oil exports, aiming to choke the supply of money to President Vladimir Putin's government.

Nord Stream had been shipping around 30 million cubic meters of gas a day before the stoppage - around 20% of its official capacity. The loss of that supply makes it harder for European utilities to continue the good progress they had made on filling their storage facilities ahead of the winter heating season.

"While storage levels across the Euro area have grown rapidly in recent weeks due to surging imports of (liquefied natural gas), the prospect for rationing and further initiatives to curb demand for gas and power prices will be the focus this week," said strategists at Saxo Bank in a morning note. "Demand destruction from soaring prices has already lowered demand, but more is needed, especially if the winter turns out to be a cold one.

The sense of crisis in Europe's energy sector deepened over the weekend after Friday's events, with Germany imposing a windfall tax on electricity generators to fund a 65 billion euro relief package for customers facing unaffordable rises in their bills, while Finland and Sweden also announced emergency packages to stop energy companies collapsing as the price of supplies skyrocketed.

Electricity prices have soared largely because of the key input of gas prices, given that much of the marginal capacity in Europe - where output can be raised and lowered easily to match the natural fluctuation of demand - is powered by gas. EU energy ministers are set to meet on Friday to discuss - among other things - plans that would decouple power prices from those for gas.

The shutting of Nord Stream means that the euro zone, "and Germany in particular," is heading for higher inflation and a worse recession than either the European Central Bank or private economists expect, said Holger Schmieding, chief economist at Berenberg Bank in Berlin, in a note to clients.

Such pessimism was reflected in all European assets at the open on Monday, with the euro falling to a new 20-year low of $0.9877 before recovering slightly to be down 0.4% at $0.9911 by 03:25 ET. The STOXX 600 fell 1.6% and the German DAX index, with its heavy weighting of industrials exposed to soaring energy prices, fell 3.0%.