European gas prices jumped on Wednesday after Russia followed through on its threat to further cut supplies to the region, raising the risk that the continent will face shortages over the winter months.
Gas prices rose 13% on Wednesday as throughputs on the Nord Stream 1 pipeline were reduced to just a fifth of normal capacity.
European politicians have accused Russia of militarizing gas supplies in retaliation for sanctions imposed following the invasion of Ukraine. The key Nord Stream 1 pipeline, which connects Russia to Germany, was first cut to 40% capacity in June, before Moscow threatened to make further cuts this week.
Soaring energy prices have stoked a cost-of-living crisis and driven up industry costs, threatening to plunge the region into recession. It has already forced European capitals to take action to try to protect consumers and industry from runaway prices.
Germany has spent billions of euros bailing out gas utilities to try to ensure it has enough supplies for the winter. France is nationalizing state-backed electricity company EDF to help contain costs for households, while the UK has rolled out a £15billion package to support voters with rising bills.
But the gas crisis has intensified in recent weeks as Russia has tightened its pressure on supplies. Europe’s benchmark TTF contract hit a high of €222.5 per megawatt-hour on Wednesday, before falling back to €202.5.
The contract is up about a quarter this week and more than doubled from where it was trading in early June, suggesting further government assistance will be needed. At these levels, the price of gas is equivalent to an oil price of $380 a barrel, almost four times the current price.
“Prices are so high that we really don’t know how the economy or demand will react – we’ve never had anything close to these price levels,” said Ira Joseph, an energy consultant. with decades of experience in the field. industry.
“We don’t yet know how all governments will react. It’s safe to say that few options will be taken off the table at this point.
The EU has decided to reduce its dependence on Russian gas, which accounted for around 40% of the bloc’s supplies before the invasion of Ukraine. It also asked its members this week to voluntarily reduce demand, cut consumption by 15% to help fill storage sites before winter.
But fears remain that industry and households will face rationing or shortages this winter, with the possibility of further supply cuts from Russia.
Goldman Sachs analysts said this week that “price destruction of demand” was becoming increasingly necessary “to help offset such large supply losses.”
Gas traders said their ability to buy and sell contracts transparently in the market had deteriorated, leading to increased volatility, financial investors backing down and utilities making the bare minimum of transactions to secure supply .
Russia has blamed the reduction in flows on Nord Stream 1 on turbine problems which it says have been exacerbated by Western sanctions. But the country’s state gas export monopoly, Gazprom, has not made up the shortfall on alternative routes.
Kremlin spokesman Dmitry Peskov denied Gazprom was limiting supplies to force the EU to roll back sanctions on Russia and said the sanctions themselves were blocking gas flows.
“Gazprom ships as much as necessary and as much as possible. It is known that the technical possibilities of gas pumping have been reduced. They have shrunk. Why? Because technical maintenance was complicated due to EU restrictions and sanctions,” Peskov told reporters, according to Interfax.
German utility Uniper said flows had fallen to 20% of what it asked Gazprom to do.
Eni, the Italian energy company, said it was told by Gazprom it would receive 27 million cubic meters of gas on Wednesday, down 20% from the 34 million it had received in recent days.
Italy has reduced its dependence on Russian gas, dropping from around 40% of its total gas imports to almost 25%, a sharp increase in imports from Algeria – which is now the most major supplier of Italy – taking over.
Mario Draghi, in a speech to the Italian parliament last week before resigning as prime minister, said the country’s “unacceptable energy dependence” on Russia was “the consequence of decades of choices to short-sighted and dangerous”.