European natural gas prices hit record highs on Tuesday, dragging down bond markets on signs that investors are expecting greater economic losses.
The European gas contract for supply in November jumped 2 per cent to € 117.50 MWh, rising to just € 18 six months ago in anticipation of a winter supply deficit. UK prices have also risen, violating ther 3 thermos for the first time, prices have tripled in the last two months.
The recent price increase means that the equivalent of gas oil in the UK and Europe is trading above 200 200 a barrel – or almost three times the crude price – with the threat of inflation spreading through a gas-dependent economy for heating and power generation.
Fuel prices are rising, driven by a sharp rise in energy demand since the lockdown eased, as well as government measures to reduce reliance on highly polluting coal, putting pressure on European governments and policymakers. Spain, Italy, France and Greece have already agreed on subsidies to protect families from high costs.
European Commission President Ursula von der Leyen said Brussels would announce the establishment of a general storage facility for gas, warned of the continent’s heavy dependence on Russia for imports and praised Norway for taking steps to increase production.
“We are very grateful that Norway is moving forward but that does not seem to be the case with Russia,” said Von der Leyen.
Russia, Europe’s largest supplier of natural gas, has limited pipeline exports to long-term deals, despite clear signs that traders want more spot market sales to meet storage facilities.
Russian President Vladimir Putin has described the situation in Europe as “hysteria and confusion”, blaming austerity measures for under-investment in fossil fuels as the economy seeks to move towards renewable energy.
Ukraine and other Eastern European countries have accused the Kremlin of trying to “arm” natural gas supplies for quick approval to launch its Nord Stream 2 pipeline, which would bypass Ukraine and take Russian natural gas to Germany via the Baltic Sea.
Rising gas prices have added fuel to recent bond prices, especially in the UK where concerns about rising energy costs have been most acute. Traders are at the top of the UK consumer inflation rate by next April.
The UK’s 10-year gilt yield rose 1.09 per cent, the highest since May 2019. The eurozone and the United States have also weakened, with 10-year U.S. Treasury yields hovering near last week’s three-month highs as investors become increasingly concerned about inflation.
“Bond market gas prices are falling,” said Mike Riddle, portfolio manager at Allianz Global Investors. “Growth is so dramatic that it’s eating away at these concerns about stagnation.”
Ten retail power suppliers in the UK have fallen since the beginning of August due to record wholesale prices, forcing millions of customers to relocate to other companies.
The average gas and electricity supply in the UK has risen to more than 8 1,800 a year, which is more than 27 1,277.