Gas prices in Europe exceeded $450 per 1,000 cubic meters due to risks in Brazil and Australia

Gas prices in Europe exceeded $450 per 1,000 cubic meters amid disruptions in the Brazilian energy system and fears of a reduction in LNG supply due to strikes at factories in Australia. During the day, prices rose by 15%, they are also pushed up by hot and calm weather in the EU. But experts consider these factors temporary and are sure that there are no fundamental reasons for a long-term rise in gas prices, given the high reserves in storage facilities.

The cost of September gas futures on the TTF index rose sharply on August 15, having increased by 16% during the day, to €40 per MWh (about $462 per 1,000 cubic meters), according to the London ICE exchange. Thus, according to the results of the auction, exchange prices for the second time since the beginning of the month exceeded $450 per 1,000 cubic meters.

The immediate cause of the rise in prices, apparently, was a major failure in the Brazilian power system, which affected almost all the states of the country except for Roraima. During the peak of the outages, 16 GW of power fell out of the system, but most power plants resumed operation during the day. However, the north and northeast of the country are not yet fully powered. The cause of the accident is still unknown. The country’s energy is based on hydroelectric power plants (more than 75% of generation), therefore, in the event of interruptions in their work or drought, Brazil usually increases LNG purchases sharply to cover the energy shortage at the expense of gas-fired power plants. A similar situation was observed, in particular, in 2021, when Brazil tripled its LNG imports, to 7 million tons.

Gas prices in Europe due to the reduction in the supply of Russian raw materials are now highly dependent on the dynamics of the global LNG market and therefore very volatile.

Last week they already rose due to the threat of strikes at LNG plants in Australia. “Recent decisions by the Australian labor regulator increase the likelihood of shutting down some LNG projects, which is putting pressure on prices,” said Sergey Kondratyev, head of the Energy and Finance Institute. Specifically, the department allowed a strike on Chevron’s Wheatstone platform on August 14 if workers voted for such a move. It may also start on Woodside Energy platforms.

The second factor in price growth, according to the expert, is the recovery of demand in China. At the same time, says Mr. Kondratiev, demand in East Asia may not be very sustainable, as China’s coal production remains at ultra-high levels.

In addition, abnormal heat in Europe is pushing prices up, adds Aleksey Grivach, deputy head of the FNEB.

For example, in Berlin the temperature exceeds 30°C. In such conditions, the demand for electricity is growing against the backdrop of the active use of air conditioners. Also, during the heat wave, there is usually calm weather, which limits the possibilities of renewable energy. The air temperature in Europe this week is expected to be the highest since the beginning of July.

At the same time, according to Alexei Grivach, these factors are temporary, and there are no fundamental reasons for maintaining prices at high levels for a long time. “Gas storages are full, demand in the industry has been killed, and there are no new problems with supply either,” the expert says. Thus, gas reserves in underground storage facilities in Europe this week can reach 90% – the European Commission originally planned to reach this level by the beginning of the withdrawal season in October. And given that injection in most EU countries can go until November, stocks will almost certainly reach 100%. Against this background, European traders began to actively pump gas into UGS facilities located in western Ukraine.

In turn, Sergei Kondratiev notes that a cold winter in the Northern Hemisphere, as well as a reduction in LNG supply in the event of accidents or other force majeure, can change the situation.

Olga Mordyushenko