On Tuesday, 28 September, the price for gas in the European market broke the $1,000 per 1,000 cubic metres barrier for the first time ever. The price for October future at the TTF Hub reached $1,031 per 1,000 cubic metres.
Several factors are perpetuating the unprecedented spike in the European continent: growing gas demand amidst COVID-19 recovery, concerns over upcoming winter supplies, and gains in other energy markets. High Asia JKM and coal prices are further adding to the price surge of European gas, with oil prices rising to their maximum in three years on Tuesday, as Brent surpassed $80 a barrel mark. There was also a preceding major delay in gas injections to European underground gas storage with storage capacity in the continent currently standing at 71%, at least 15% below the five-year average. As a result, the benchmark Dec-21 EU carbon contract (CFI2Zc1) was up €0.93 at €65.3 per tonne, hitting a new record high.
Currently, global markets are simmering with concerns about winter natural gas prices surge. Colder-than-average temperatures could trigger extreme volatility for natural gas prices in the upcoming winter in Europe. Any further hike in price will feed into utility costs, which are already weighing heavily on European consumers facing multiple pandemic-related challenges as gas is broadly used for home heating and cooking as well as electric power generation.
Across Europe, multiple governments have had to intervene and announce support to keep gas and electricity bills down. The Italian government has unveiled a plan worth €3bn for the most vulnerable households, as gas and electricity prices could increase by 30-40% in the next quarter in the context of surging gas prices. France has said it will send a one-off €100 payment to over 5.8 million low-income households. In Madrid, the government has promised to bring prices down to 2018 levels, whilst the UK government committed to ensure no customers will experience gas cuts during the winter.
A record-breaking surge in energy prices in Europe hampers the post-COVID-19 recovery with already suppressed household incomes, but now with increased public scrutiny of the EU climate policy and the continent’s nascent European ‘green’ energy transition. As a part of early energy transition steps, European companies under the EU Emissions Trading System (EU ETS) are bound to keep buying and trading carbon permits. A rapid post-COVID-19 recovery and energy crunch have pushed the carbon price by about 80%, from €34 in January 2021 to as high as €65 in September. This price rise is typically passed down to the consumer.
These recent developments, which sadly affect the entire strata of society still reeling from the devastation caused by COVID-19, validate the long-held position of the Gas Exporting Countries Forum (GECF) on a balanced approach to managing the energy transition.
The GECF’s continuous support of the various (realistic) pathways in the energy transition – as outlined most recently in its statement to the UN High-Level Dialogue on Energy – calls for
an inclusive and uninterrupted access to modern energy sources whilst highlighting energy security as a foremost global agenda item.
From the perspective of natural gas suppliers, the 18-member coalition together representing the largest share of proven reserves, production, and trade of natural gas in the world, maintains adherence to the spirit of 2019 Malabo Declaration, adopted at the 5th GECF Summit of Heads of State and Government. The Declaration unreservedly supports the fundamental role of long-term gas contracts as well as the gas pricing based on oil/oil products indexation, to ensure stable investments in the development of natural gas resources. Such principle provides a solid base for, most importantly, natural gas buyers as well as supplies protection against price volatility. For example, Qatar's long-term contracts represented around 60% of its natural gas exports. Algeria, Russia, and other GECF Member Countries have also favoured and will continue to rely on long-term contracts with pricing indexed to oil.
That is certainly one way to ensure unabated supply of gas to all parts of the world and avoid a future gas crisis.