At the time of writing (30th March), the Russo-Ukraine conflict still continues to rage, causing uncertainty to continue within the energy markets, and wider global economy. On the morning of the 30th, Germany had declared an ‘early warning’ of a possible gas supply emergency, with the country beginning emergency plans to mitigate the risk of supply from Russia. This announcement is the clearest so far that the European Union is preparing itself for supply disruptions as a result of imposing economic sanctions on Russia. The past week also saw G7 nations reject Russia’s plan to switch payment of gas from ‘unfriendly countries’, such as the UK, from Euro’s to Roubles – causing increasing volatility in gas markets.
55% of Germany’s gas imports is from Russia, and whilst that figure dropped to 40% in the first quarter of this year, Germany is not expected to achieve full independence from Russian supplies before mid-2024.
What is the emergency plan?
The early warning is the first of 3 stages under Germany’s existing gas emergency plan and does not yet state intervention to ration gas.
- Early Warning – Signs an emergency could develop
- Alarm – in the event such as disruption to supply or extraordinarily high demand upsets the normal balance but is able to be resolved without intervention
- Emergency – when market based balancing measures are insufficient to resolve shortages in supply. At this point, Bundesnetzagentur (German network regulator) decides on how to distribute remaining gas supplies across the country.
The German industrial sector will be affected first, causing significant economic impact on supply chains, with private households holding priority over industry. Care facilities, hospitals and other public institutions with special needs would be last affected by disruption.
Market Update
There are fears of similar actions in other European countries, particularly those with a strong reliance over Russian gas. Market impacts such as price increases have resulted from this news, Germany could also start to import from the likes of Britain, Denmark, Norway and Netherlands – however, all are likely to face supply tightness. Markets are anxious regarding the dispute of Roubles payments for Russian gas, with both sides in disagreement and waiting for the other to blink first.
*Update as of 31st March – Putin had vowed to cut supply tomorrow unless Europe pay in Roubles, however we now understand that European countries can pay in Euro’s, with Gazprombank converting Euro’s to Roubles*.
It is likely that until there is clarity or any change in supply, we will see energy prices well supported in the short term despite the mostly fundamental bearish view.