January 28, 2022

Beyond Going Long

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Energy prices in Europe rose sharply due to cold weather

European energy prices rose sharply on Monday. The reason is weather forecasts that assume lower temperatures in the next two weeks, which will increase heating demand.

The reference gas contract with delivery next month on Amsterdam ICE Endex jumped 9.7% to €96.25 per megawatt-hour (MWh).

Across much of Europe, temperatures are expected to be below seasonal averages in the coming months, with lowest levels in Scandinavia. In addition, a series of production outages in Norway are likely to reduce gas supplies.

As winter approaches, energy markets are becoming increasingly sensitive to the increasing demand for lower temperatures in the Northern Hemisphere.

Poor delivery from Russia

European gas prices have more than tripled this year. The main reason was poor supplies from Russia, which left European gas reserves the lowest in more than a decade at the start of the current heating season. Currently, the reservoirs are 64% full, while the 10-year average for this period of the year is 86%.

Moscow has repeatedly stated that it can save more gas after the launch of the controversial Nord Stream 2 pipeline, according to some European politicians.

“Given the currently fragile market equilibrium, any longer period of cold weather below the seasonal average is likely to turn the end-season gas supply outlook into critical levels, which will support price increases,” said Stefan Ulrich, analyst at BloombergNEF. The winter will be very cold, and other extraordinary measures to cool the gas and electricity markets cannot be ruled out.

Cold weather has pushed short-term electricity prices in Germany and France to near record levels. The price of emissions permits for December on ICE Endex jumped to a record high of €75.74 per ton.

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