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Is Europe’s energy crisis artificially made?

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The energy crisis gripping major economies shows no sign of easing, driving up business costs, household bills and sending inflation soaring.  Natural gas and power prices in Europe and Asia are skyrocketing, while U.S. prices have doubled this year.

Several factors are fueling the extended climb in natural gas prices, raising the prospect of a difficult winter in the Northern Hemisphere as heating demand rises. As with most commodity price surges, the main backdrop is the mismatch between stagnant supply and rebounding demand.

As economies get back to business and consumers return to pre-Covid activities, demand shot up and energy producers struggled to meet the growing demand, pushing up prices.

Extreme weather is also playing a role. Europe had a colder winter so people were heating their homes for longer than usual, therefore we now have dramatically reduced natural gas inventories.

On top of that,  Europe’s shift towards cleaner energy, with many countries moving away from coal to gas to produce electricity, increased Europe’s reliance on gas.

The price of Europe’s leading benchmark TTF has moved from less than $9/MMbtu in May to over $33/MMbtu last week.

“Europe is seeing a perfect storm in its natural gas market,” Simone Tagliapietra, a senior fellow at the Brussels-based economic think-tank Bruegel told Euronews, due to a combination of factors on both the supply and demand sides.

The International Energy Agency said that Russian exports to Europe this year were lower than they were in 2019 and European lawmakers accused Russia that played a role in Europe’s gas crunch.

Russian President Vladimir Putin last week said Moscow  could “reach another record of deliveries of our energy resources to Europe, including gas”, sending prices lower.

Russian officials have already said state-owned energy giant Gazprom  that supplies 35% of European gas needs, can send more gas to Europe if Nord Stream 2 pipeline built to carry gas to Germany under the Baltic Sea gets quickly approval from the energy regulator in Berlin to start operating commercially.

Vladimir Chizhov, Kremlin’s ambassador to the EU, told the Financial Times on Monday (Oct. 11)
that the supply crisis would be resolved more quickly if the bloc stopped treating Russia as as a geopolitical “adversary”. He also insisted Moscow had no interest in gas price surges as it does not promote stability.

“Change adversary to partner and things get resolved easier . . . when the EU finds enough political will to do this, they will know where to find us” Russia’s permanent representative to the EU told the FT.“All the problems that are arising have been created artificially. Primarily for political reasons,” he added.

The EU is  reducing the share of long-term deals in natural gas trade and moving to the spot market instead. Putin said last week that Europe had made a mistake by favoring short-term contracts with suppliers.

Gazprom
(Source: Gazprom)

Echoing a similar sentiment, Chizhov told the London-based newspaper: “Long-term contracts . . . provided security of supply and stability of volumes and prices. Then came this idea, emanating from Brussels, that the system should be changed,” “We know that market rules may be helpful in some situations but quite unhelpful in others. Things can change. And they did change.”

Analysts say that Gazprom sees longer-term contracts and longer-dated prices as a tool that would help Europe mitigate the impact of extreme volatility.

According to preliminary data, Gazprom produced 378.1 billion cubic meters of gas in January–September of 2021, which is 17.3 per cent (or 55.7 billion cubic meters) more than in the same period of last year. Specifically, Gazprom increased gas supplies to Turkey (+138.3 per cent), Germany (+33.2 per cent), Italy (+14.2 per cent), Romania (+305.6 per cent), Serbia (+125.2 per cent), Poland (+11.2 per cent), Bulgaria (+52.5 per cent), Greece (+10.8 per cent), and Finland (+17.5 per cent).

“Oddly enough, the state of play for global energy markets—particularly natural gas markets—this winter will truly depend on the weather. A relatively mild winter will ease tightness in both oil and gas markets. While a particularly frigid winter will send prices soaring even higher than they already are”, Rob Smith, IHS Markit’s Director, Global Fuel Retail wrote.

UPDATE 13/10/2021

Putin says Russia ready to work with EU to prevent problems in energy markets

Russian President Vladimir Putin said Wednesday (Oct. 13) that the gas market in the European Union “does not look well balanced and predictable,” noting that European countries did not plan and did not replenish their stockpiles during the summer. “Higher gas prices in Europe are a consequence of a deficit of energy and not vice versa and that’s why we should not deal in blame shifting, this is what our partners are trying to do,” he told delegates at the Russian Energy Week International Forum in Moscow.

“What is happening today in the energy markets of Europe is, to a certain extent, a man-made result of short-sighted policy. But these are their problems. We are ready to participate in preventing such problems. We just need, I repeat, an honest and open dialogue,” TASS news agency quoted the Russian leader as saying.

Putin also dismissed accusations that his country is using energy as a “weapon” to achieve its geopolitical goals, adding that such claims are “utter nonsense” and “politically motivated blather.” He added that Moscow did not reject any demand to increase energy supplies, and it is ready to increase them further upon receiving additional requests to make such steps.

Kremlin spokesperson Dmitry Peskov said on Wednesday that Russia is ready to increase the gas supply through Ukraine if the European Union boosted its purchases and asserted that Gazprom is fulfilling all its obligations to the EU and that the gas supply has already reached its maximum level under existing contracts.