Record gas prices hit bonds as investors fear wider damage
European natural gas prices shot to record highs on Tuesday, dragging down bond markets in a sign that investors were expecting wider economic damage.
European gas contracts for delivery in November leapt 23 per cent to €117.50 a megawatt hour, up from just €18 six months ago, on the prospect of supply shortages over winter. UK prices also soared, breaching £3 a therm for the first time, with prices tripling in the past two months.
The latest price gains mean gas in the UK and Europe is trading at more than $200 a barrel of oil equivalent — or almost three times the price of crude — with inflationary effects threatening to ripple through economies reliant on gas for heating and power generation.
Surging energy prices, which stem from a rapid increase in energy demand since lockdowns eased as well as government moves to cut reliance on highly polluting coal, have put pressure on governments and policymakers in Europe. Spain, Italy, France and Greece have already agreed subsidies to protect households from higher costs.
Ursula von der Leyen, head of the European Commission, said Brussels would explore setting up common storage facilities for gas, warning about the continent’s heavy dependence on Russia for imports, while praising Norway for taking steps to raise production.
“We are very grateful Norway is stepping up but this does not seem to be the case for Russia,” von der Leyen said.
Russia, the largest supplier of natural gas to Europe, has restricted pipeline exports to long-term contracts, despite clear signs traders want more spot market sales to help fill storage facilities.
Russian president Vladimir Putin described the situation in Europe as one of “hysteria and confusion”, blaming tight supplies on under-investment in fossil fuels as economies try to pivot towards renewable energy.
Ukraine and other eastern European countries have accused the Kremlin of attempting to “weaponise” natural gas supplies to secure quick approval to start up its Nord Stream 2 pipeline, which would carry Russian natural gas to Germany through the Baltic Sea, bypassing Ukraine.
The gas price surge has added fuel to a recent drop in bond prices, particularly in the UK where concerns about the rising cost of energy have been felt most acutely. Traders are pricing in a peak in the British consumer price inflation rate at nearly 6 per cent by next April.
UK 10-year gilt yields surged to 1.09 per cent, the highest since May 2019. Debt in the eurozone and the US also weakened, with 10-year US Treasury yields climbing close to last week’s three-month high, as investors became increasingly concerned about inflation.
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“Bond markets are trading off gas prices,” said Mike Riddell, a portfolio manager at Allianz Global Investors. “The rise is so dramatic that it’s feeding these concerns about stagflation.”
In the US, benchmark gas futures rose almost 10 per cent on Tuesday to settle at $6.30 a million British thermal units.
Record wholesale prices have also led to the collapse of 10 retail energy providers in the UK since the start of August, requiring millions of customers to be transferred to other companies.
The cost of supplying the average household in the UK with gas and electricity for a year has soared to more than £1,800, far above the £1,277 price cap.
Additional reporting by Derek Brower in New York
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