Europe is at war. The invasion of Ukraine by Russia has put an end to almost a quarter of a century without confrontation on the old continent. Despite the remoteness of the conflict, the political, economic and social implications are extensive. From a predictable increase in the price of some raw materials, such as wheat or corn, to a cataract of sanctions and interrupted commercial flows.
And no sector will be as affected as energy.
gas, 50%. The most immediate consequence of the invasion: a drastic rise in natural gas prices. Its cost has shot up more than 50% first thing in the morning, following the outbreak of the conflict. Futures contracts are currently trading at €138/MWh, their highest price in recent weeks. The escalation is likely to continue over the next few days, although the December record (€166/MWh) is still a long way off.
Back. Gas, as we saw a few weeks ago, had begun to gradually become cheaper thanks to the agreements reached by the main European states in terms of purchase and supply. Two turns of events have put an end to the containment: the temporary suspension of NordStream 2, the great logistics project agreed by Russia and Germany to expand the flow of gas from the interior of the Urals to the Baltic; and the impending sanctions.
Much of Europe depends on Russia for its energy supply. The war and probable economic isolation that the country faces will not stop, but it will make the flow of gas to the continent more expensive.
The oil. Although the gas situation is more delicate due to the interdependence of Europe and Russia, oil will also be affected in the short and medium term. The barrel of Brent has exceeded $100 this morning, which will affect the price that the consumer will pay at the gas station. Before the invasion, the markets were already discounting a drastic rise, pointing towards $150 a barrel. The start of hostilities will simply accelerate the previous dynamics.
Back and forth. Although the European consumer must discount a general rise in energy prices, the war harms both the European Union and Russia. More than 70% of the natural gas exported by Russia goes to Europe. A total interruption of commercial relations would cause daily losses of between 203 and 228 million dollars for Gazprom. If the rupture were to last until the spring, the losses for the Russian economy, highly dependent on its energy exports, would rise to 20,000 million dollars.
None of this is as obvious as it is in NordStream 2: Gazprom has committed more than $5 billion to the project, which is of great strategic importance to Russia. Its cancellation has been the biggest setback for the Putin government to date.
More purchases? Thus, we should not expect a cut in supply from Russia to Europe. as explained here Javier Blas, the leading energy analyst at Bloomberg, the peculiar structure of the contracts issued by Gazprom makes it likely that continental importers are forced to buy more Russian gas in the coming weeks. Basically, it is more profitable to go to contracts whose price was closed in February than to those issued in the future, which are much higher.
reorientation. In any case, in the long term the situation changes. The suspension of Nordstream 2 forces Germany and the rest of Europe to look for different energy sources. As explained in this Wall Street Journal report, it will be a very gradual process: German energy policy has been very oriented towards Russian gas in recent decades, to the point that Schröder, Merkel’s predecessor, has devoted a good part of his post-foreign ministry career to work for Gazprom.
What alternatives does Germany have if the conflict becomes entrenched? First, return to coal, an energy that she has never been able to get rid of. And second, perhaps, to put an end to the nuclear moratorium approved by Merkel after Fukushima. In either case, Europe is headed for a scenario similar to that of 1973, when another war, this time in the Middle East, sent oil prices skyrocketing and put an end to decades of post-World War II growth and development.
Hopefully this explains as to why, if you hold a Russian contract, you are now incredibly incentivized to up your nomination.
A tranche of what you pay for contract gas was determined by where February gas was trading in January. Your other option is paying the new spot price? pic.twitter.com/aNFqnLhC5y
— Thomas Rodgers (@TomLRodgers) February 24, 2022
Image: Valentyn Ogirenko/Reuters