European energy prices surge as Russia supply-risk buoys gas

European energy prices surged, with natural gas extending last week’s advance following concerns about Russian pipeline supplies across Ukraine.  

Benchmark futures jumped as much as 6.2% to trade at the highest level since early December. Electricity prices in Germany and France followed gas, with year-ahead futures trading at the highest since June. 

Market anxiety is high even as Russian pipeline gas supplies continue to flow via the Sudzha intake point on its border, after Ukrainian troops made a surprise cross-border incursion last week. Separately, Ukraine said late Sunday that Russian troops started a fire on the grounds of the occupied Zaporizhzhia nuclear plant, though radiation levels appear to be normal at the facility. 

Europe has weaned itself off most Russian pipeline gas supplies since the start of the war in 2022, but some countries — notably Austria and Slovakia — still rely on it. Sudzha is now the only operating transit station for Russian flows across Ukraine to the European Union. 

Norwegian Supply, LNG Competition

The focus is also on upcoming heavy maintenance at Norwegian facilities from the end of August, as well lower supplies from the Nordic producer amid some ongoing works.

Europe competes with Asia for liquefied natural gas cargoes, which may further tighten the market. For the time being, elevated gas prices in the region during the crucial stockpiling season will likely attract more supplies from the US, the top provider. Europe’s LNG imports slumped in July, while Asia received the most monthly US cargoes since 2021, ship-tracking data compiled by Bloomberg show.

Softer LNG demand in Asia this month — in part due to easing temperatures — and heightened geopolitical risk in the Middle East — is altering the profitability of LNG shipping routes, “opening up the potential for more US cargoes to divert to Europe,” according to S&P Global Commodity Insights.

Still, competition for LNG with Asia remains fierce, as last month illustrated how quickly Europe’s flow of the fuel may dry up. Heat waves, particularly in Asia, have helped to drive demand. China’s gas power capacity is rapidly expanding, though the surge has been limited by high costs and the availability of fuel supplies, according to BloombergNEF.

“We’ve seen a heat wave in both Japan and China in the last month, with their fleets responding by increasing output,” and China in particular burning more gas, said Tom Roberts, chief executive officer of London-based Xterna Group, which analyzes energy data.

“The elephant in the room is this upcoming winter,” he added. “The focus seems to be on geopolitics in general at the moment, yet these gas intensive countries are consuming record levels of gas.”

Dutch front-month gas futures, Europe’s benchmark, traded 3.2% higher at €41.79 a megawatt-hour by 2:30 p.m. in Amsterdam. German year-ahead power prices hit €100 a megawatt-hour for the first time since June 3. The French equivalent also rose to a two-month intraday high.