European gas prices jump as geopolitical risks trump fundamentals

European gas prices rallied in the week to Oct. 13 as geopolitical risk factors trumped supply and demand fundamentals with coal and carbon prices only registering moderate gains.

Gas price benchmark TTF front-month jumped 46% over the course of the week to a Eur52.95/MWh close Oct. 12, the highest in almost eight months, according to Platts assessments for S&P Global Commodity Insights.

"We cannot see the link of such spike in prices with anything related to fundamentals," a Switzerland-based gas trader said.

Market participants indicated covering of short positions contributed to the sharp rebound across gas and power markets just ahead of the start of the winter heating season with geopolitical risks trumping supply and demand fundamentals.

EU gas storage was 97% full Oct. 10, according to Gas Infrastructure Europe data

"Apart from the geopolitical uncertainty following the war outbreak in the Middle East, the pipeline sabotage in the North Sea and the suspected Russian involvement causes fears that similar things could happen to other and more critical pipelines in Europe," broker Energi Danmark said in a note Oct. 13.

Finland is investigating damage to the Balticconnector gas link between Finland and Estonia amid signs it was caused by a "possible deliberate act."

The Platts assessments for spot LNG cargoes into Northwest Europe jumped 50% week-on-week to $15.72/MMBtu by Oct. 12.

The LNG benchmark Platts JKM for Asian spot cargoes for November was assessed Oct. 13 at $15.35/MMBtu, falling back to a slight discount over European spot LNG assessments.

Elsewhere, the UK's NBP front-month contract was last assessed by Platts at 133.40 pence/therm (Eur52.74/MWh) Oct. 12, a slight discount to TTF.

On the Continent, Spain's PVB hub become the discount hub last assessed by Platts at Eur51.84/MWh.

Coal sees moderate gains

The price of coal delivered to northwest European ports rose to $141.10/mt, up 18% week-on-week.

European coal prices tracked the gas market and were supported by restocking at generation sites.

This has now begun in earnest and drove port stockpiles to five-week lows.

"The recent surge in spot coal prices is in conjunction with global commodity markets as they react to the dual threats to global oil and LNG markets on the upheaval in the Middle East and the renewed threat of strike action at Australian LNG suppliers," S&P Global Commodity Insights' analysts said Oct. 11.

Current market fundamentals of ample supply for the approaching winter demand remains a factor, however, providing a floor around $120/mt, they said.

Generation costs for 50% gas-fired power plants rose to the highest since early March and at Eur137/MWh for the month-ahead are now above those for older 35% efficient coal units in Northwest Europe, according to S&P Global Commodity Insights data.

Gas rally lifts carbon

European carbon prices rose 6% in the week to Oct. 13 as gas price climbed, as did the potential for gas-to-coal switching in markets like Germany.

EUA allowances for Dec. 2023 were trading above Eur85/mt as at 1 pm London time Oct. 13, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed the EUA contracts at Eur80.64/mt on Oct. 5.

Higher gas prices would lift demand for EUAs in coming weeks as gas gains far outweighed the moderate increased for coal and carbon improved generation margins for coal and lignite in favor of gas.

Carbon trading company Belektron said some geopolitical factors had also helped prices recover.

"One of the primary factors driving this resurgence can be attributed to the gas market's sharp reaction to the news of an escalation of conflict in the Middle East," it said.

Analysts also said the return of German lignite-coal reserve capacity this winter would help drive some buying interest.

Germany's government on Oct. 4 extended regulation that allows 1.9 GW reserve lignite plant to return to the market this winter.

S&P Global analysts expect EUAs to rebound to Eur84.8/mt in November from a Eur78.30/mt average forecast for October.