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After weeks of covering the remarkable, record hyperinflation in European gas prices, which have soared to such tremendous levels that protests against the price of electricity across Europe are a daily occurrence , it is hardly a secret to anyone that the cost of living in Europe this winter will be especially miserable, and could be even more miserable if Vladimir Putin decides to throttle gas deliveries to Europe. Of course, Europe’s “green” obsession to fight climate change is also a key contributor to the explosive move in the price, with Deutsche Bank writing today that “if governments are serious about addressing climate change then there will be a huge cost and taxing carbon will be regressive. As such they will have to spend even more to help out lower income households.”
In other words, all those who are have so generously signaled their virtuous desire to fix the climate are about to pay through the nose for the privilege.
A quick big picture recap for those who have missed the biggest move in gas prices in history, here is a quick primer.
Over the past month, European natural gas prices have rallied more than 40% and more than 14% this week – to a record-high 22/mmBtu. While NW European gas inventories are at record-low levels for this time of the year, there have been no significant changes to fundamentals in recent days and the Oct-Jan spread has remained virtually flat in this latest rally. This suggests that current prices reflect not only the tight current balances in NW Europe, but also a growing winter risk premium, which according to Goldman is near $3/mmBtu, to price a probability that regional gas prices will need to incentivize demand destruction and/or attract incremental LNG this winter. This is the equivalent to pricing a 21% probability that TTF rallies to the $32/mm Btu highs observed in JKM earlier this year, when Northeast Asia gas markets were tightened by a cold winter event.
How did we get here? In three words, weather, LNG and, more recently, Russia.
Northwest European gas inventories, currently 24% below average, have […]
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