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Coronavirus crisis shakes Europe's power, gas prices

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03/24/2020 | 10:58am EDT
FILE PHOTO: Smoke and steam billows from Belchatow Power Station

European power and gas prices have sunk to new lows as lockdowns due to coronavirus dent energy demand, though signs of a recovery in liquefied natural gas (LNG) buying in Asia could lend support.

The coronavirus outbreak has triggered a sudden and unprecedented slump in energy demand in Europe and stoppages in most power-intensive manufacturing at a time that residential heat markets for gas move into spring mode, when usage drops.

Some gas producers and operators, such as Norway's Equinor and gas system operator Gassco, have even said they are delaying or cancelling maintenance work at gas processing plants and platforms.

However, signs of a tentative recovery in Asian demand, where spot LNG prices have risen for three straight weeks, could offer some support.

Asian and European physical gas markets have become more linked on a global scale due to rising spot volumes, an increase in LNG paper trading, and hedging.

"While Europe has now become the epicentre of the pandemic, Asian (gas) spot prices are already increasing as demand picks up," said Kepler Research.

The benchmark German wholesale 2021 power price hit a two-year low of 33.50 euros ($36.27) a megawatt hour (MWh) on Monday, having lost 14% over the last two weeks before rebounding on Tuesday.

Wholesale gas prices had already been falling since last year, winning market share from coal in burning for power.

The Dutch day-ahead gas price on the TTF hub has been hovering just above 8 euros/MWh, revisiting record lows last seen at the start of winter last October, in the 2009 financial crisis and briefly in 2007.

"We won't see 10-15 euro levels (for power). Power generation plants cannot produce at that price," said Hanns Koenig at consultancy Aurora.

For the gas market, with prices at around 8 euros, "nobody's making any money", he said.

Buyers are expected to invoke options in their contracts to reduce imports via pipeline, which could result in output cuts in producer countries such as Russia or Norway.

"TTF (gas price) levels will need to fall to levels that discourage LNG or pipeline supply," said consultancy Energy Aspects.

DEMAND SLUMP

European energy demand could fall more than 4% over the next two months, Norwegian consultancy Rystad said. Growth estimates for this year as a whole are limited to as little as 0.36%.

The impact on utilities stocks has been merciless, with the European sector index <.SX6P> losing a third over the past four weeks in an industry where debt and liquidity positions are highly varied.

German industrial demand for power could drop by up to a fifth this year and spot wholesale prices by up to 4.7%, according to Germany-based energy consultancy Enervis.

Other analysts see a price fall of 5-10% after lockdowns end.

"This would imply 1 euros per megawatt hour (MWh) losses at the lower end and 1.85 euros at the upper end of the range of the average 2020 spot price over the year," said analyst Mirko Schlossarczyk.

Prior to the outbreak, Enervis had expected 2020 spot prices to average 39.6 euros. The day-ahead contract, a daily snapshot, currently stands at around 22.25 euros.

German economic institutes predict anything from mild recession shrinking GDP by 1.5% to a generational crash, which would wipe out 9% of GDP in Europe's industrial powerhouse.

The fall of power, gas and oil prices has had a knock-on effect on carbon permit and coal prices.

EU carbon prices hit 22-month lows at 15 euros a tonne on Monday, while European coal 2021 futures, at $56.4, are only $1.9 about the contract low.

Although coal use has been diminishing in Europe, it could be considered as a cheap and reliable source of energy to rebuild economies after the pandemic, said Steve Hulton, Rystad Energy?s head of global coal research.

By Vera Eckert and Nina Chestney

Stocks mentioned in the article
ChangeLast1st jan.
E.ON SE 4.25% 10.05 Delayed Quote.1.22%
ELECTRICITÉ DE FRANCE 2.41% 8.586 Real-time Quote.-15.55%
RWE AG 4.11% 31.66 Delayed Quote.11.19%
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