This week NZ Funds published an article discussing Russia’s suspension of the Nord Stream 1 gas supply.
Natural gas prices have reached extraordinary highs. As of 6 September, Dutch TTF Gas was up 365% on a year earlier, while UK Natural Gas was up 245%. Part of the solution has been increasing supplies of Liquefied Natural Gas (LNG) from the United States. This has pushed the US Natural Gas price up 92% compared to a year earlier.
Prices for natural gas in Europe are now so high that there’s a fear they could trigger a default by a major utilities company that causes a domino effect across Europe. Historically, European utilities companies have hedged their exposure to natural gas price fluctuations through the use of futures contracts. In normal circumstances, this is a way of smoothing costs. But because of the extreme and rapid price rises, some of these futures contracts have left utilities companies dangerously exposed to margin calls.
Consumers – and the wider economy – are bearing the brunt of the crisis. There is now talk that Europe must contemplate a ‘zero Russian gas’ scenario for the coming winter. The only real answer is long-term replacement of Russian natural gas, reinforcing the importance of the green energy transition.