German Utilities Costs Soar to Record Levels as Energy Crisis Deepens

European electricity prices jumped to new highs as natural gas continued to rise, exacerbating an energy crisis that threatens to plunge the region into recession. The cost of contracts for the supply of electricity next year in Germany rose by 3% to 474 euros per MWh at the European Energy Exchange AG. This is almost six times as much as at the same time last year, and the price has doubled in the last two months.

The market is driven by fears of a shortage of natural gas in Europe, which will not allow enough electricity to be generated this winter. Nuclear power generation in France is extremely low, limiting the ability to export electricity in the coming months, and in the short term, heatwaves put pressure on infrastructure.

Underlying Dutch hub gas next month contract extended last week's gains, trading up 3.5% on the Ice Endex in Amsterdam. The unprecedented cost of powering the continent is putting pressure on consumers and industry. Politicians across the region are considering further measures to ease the pain and soften the blow to their economies from rising spending.

This week another debilitating heat wave is expected to hit northwest and central Europe, putting additional pressure on the continent's overstretched energy infrastructure. According to Maxar Technologies, heatwaves in the UK, Germany and France are expected to reach nearly 36 degrees Celsius (96.8 Fahrenheit) by this Friday. The heat is forecast to further accelerate and, hence, the need for cooling will become even more acute, exacerbating already dry conditions that are detrimental to crops, and impose restrictions on water use.

Extreme heat has already taken its toll on the continent, with France recording its driest July on record and England its driest in nearly 90 years, highlighting the warming climate's impact on vital infrastructure. The water level of the Rhine River, a vital artery for the transport of goods and manufactured goods, is so low that navigation and trade on some stretches of the waterway is in danger of being stopped.

On top of that, the International Energy Agency (IEA) reported that the OPEC+ should not be in a position to carry out the expected oil output increase in the coming months due to limited spare capacity. In fact, the 100,000 barrels per day (bpd) production target increase that OPEC+ set for September may end up effectively being a production cut as Russian production declines. That remark was contained in the IEA monthly report for August 2022 that was released on Thursday last week.

So, finally, we don’t observe a single valid reason for oil prices to remain in sub-$100/bbl levels for a prolonged period of time, so energy stocks and energy futures are definite strong buys from the current levels.