EU Utility Pain Worsens as Russian Gas Price Soars

The price European utilities pay for their natural gas is on a tear. Rates for Russian fuel at the German border last month jumped the most in seven years, extending their gain since September to almost 50%, according to the International Monetary Fund.

The price of fuel from Moscow-based Gazprom PJSC may increase further even as prices on traded hubs decline, according to analysts including Deutsche Bank AG, Bloomberg reported.

That is bad for European utilities, from Italy’s Eni SpA to France’s Engie SA, which are already grappling with a slump in power prices and the need to spend billions on upgrading grids and old plants.

While the Russian supplier says changes in its export price reflect moves in both oil and gas-hub rates, a link with crude still dominates, Deutsche Bank analyst Pavel Kushnir said.

“We’ll likely see a further upward trend in Gazprom prices, especially strong in the second quarter,” Deutsche Bank analyst Pavel Kushnir said by email.

The price of gas supplied by state-owned Gazprom at Germany’s border climbed 14% in February to $5.88 a million British thermal units, the IMF data show. Day-ahead gas on the UK’s National Balancing Point fell 20% in February, according to broker data compiled by Bloomberg.

Gazprom, which supplies about a third of Europe’s gas, sees its prices recovering from a 12-year low in 2016. Most of the exporter’s contracts have an oil link, usually with a delay of six to nine months, while some also have minimum and maximum prices indexed to market rates.

Brent crude may climb almost 20% by the end of the year, Morgan Stanley said on Friday. While spot gas is seen falling further during the warmer summer season, Russian gas flows are unlikely to decline significantly, Kushnir said.

Gazprom plans to ship a record volume to its biggest market for a second year even as more liquefied natural gas may come to Europe this summer. It sees European gas demand rising about 5% in 2017, deputy head Alexander Medvedev said last week in an interview.

The clean-dark spread, a measure of gas power plant profitability, has been negative in Germany since January 2012, according to broker data compiled by Bloomberg. That has led to the closure of plants, leaving the fuel trailing coal, nuclear, wind and biomass in electricity generation last year.

“Rising gas prices crush the hope that German utilities could bring back previously mothballed gas-fired power stations any time soon,” said Elchin Mammadov, an energy analyst at Bloomberg Intelligence in London.