Nord Stream 2 slows down coal and gas price rally

This summer, European gas indices surged to 13-year highs as a result of a number of factors, ranging from low inventories and outages in Europe to the growing demand in the Asia-Pacific region. TTF gas prices in July 2021 soared to 12.5 USD/mio BTU, which is 7 times more year-on-year.

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The rally in gas quotes boosted coal demand to pre-pandemic levels, increasing daily coal indices to multi-year maximum over 150 USD/t. Average coal quotes in July 2021 increased almost threefold to 130 USD/t in comparison with 50 USD/t in July 2020. Among key factors occurring on the gas market that enormously contributed to the positive dynamics of coal quotes are a shortage of gas supplies to the EU, a robust recovery of electricity demand and a lower output of RES in Europe and Asia-Pacific.

In 2021, a cold snap in winter and heat waves during summer season left the European gas storages depleted. In August, EU gas storage capacity decreased to 8-year lows below 60%, while occupancy rate at a number of storage facilities declined even below 15%. A series of unexpected disruptions at the enterprises of the key Russian producer Gazprom, speculations over the launch of the Nord Stream-2 gas pipeline and the US liquefied fuel being redirected from Europe to Asia only aggravated the market situation. Given the scarce and expensive gas, key generating companies ramped up coal burning to prevent electricity outages.

Economic activity, recovering close to pre-COVID-19 levels both in Europe and Asia, prompted heightened demand for electricity. Scarce gas has given way to more available and cheaper coal, despite high EU carbon prices over 55 USD/t and coal-phase out policy commitments.

Lower wind output in the EU coupled with droughts and limited access to hydropower in China provided additional support for the recent bull run in coal prices.

Nevertheless, Gazprom recently confirmed its plans to launch Nord Stream-2 gas project in October 2021. Under the experts, the new pipeline may dramatically ease the current gas supply crunch in Europe and bring the European gas market to balance in the run-up to the heating season. TTF gas quotes have already started adjusting to the potential growth in supplies, maintaining pressure over coal.

Over the week, coal prices in the EU have been dwindling back to 150 USD/t following the news on the expected gas supplies via the Nord Stream-2 project. Sufficient gas shipments to Europe may decrease coal demand further amid expensive EU carbon permits and the environmental restrictions over coal usage in European states.

Source: CAA Analytics