Euro Hits 20-year Low and Gas Prices Jump on Russian Pipeline Shutdown

The euro dropped on Monday to a 20-year low after Russia’s decision to shut a major gas pipeline to Europe intensified the energy crisis that has dealt a heavy blow to the region’s economy.

The common currency fell as much as 0.7 per cent to $0.988, its lowest level since 2002 — later trimming its declines to trade down 0.2 per cent. European stocks also fell, with the regional Stoxx 600 index closing 0.6 per cent lower, Germany’s Dax off 2.2 per cent and France’s Cac 40 down 1.2 per cent. London’s FTSE 100 ended the day 0.1 per cent higher.

In energy markets, Dutch TTF gas futures, the benchmark European contract, jumped by more than a third to as much as €284 per megawatt hour, rising back towards all-time highs that hit above €340 just under two weeks ago. Later in the day, the contract was up 17 per cent at €246.

The price rise comes as European capitals struggle to contain growing concerns over Russia’s “weaponisation” of gas supplies to the continent after Moscow said on Friday it would suspend the flow of gas through the Nord Stream 1 pipeline.

Dmitry Peskov, Russian president Vladimir Putin’s spokesman, said on Monday that Russia’s gas supplies to Europe would not resume in full until the “collective west” lifts sanctions against Moscow.

“The problems pumping gas came about because of the sanctions western countries introduced against our country and several companies,” Peskov said, according to Interfax. “There are no other reasons that could have caused this pumping problem.”

Gazprom, Russia’s state-run gas monopoly, had said on Friday it would halt gas supplies through Nord Stream 1 because of a technical fault, which it blamed on difficulties repairing German-made turbines in Canada.

“This was long a scenario dreaded by markets and priced with some probability, but seems to have become a reality now,” said analysts at RBC Capital Markets in London.

Sweden and Finland moved at the weekend to provide government funding for utility companies struggling with sharply heightened collateral requirements on exchanges, warning that without intervention energy markets could seize up and potentially threaten the wider financial system.

Analysts at Citi said on Monday that their previous “bull case” for the gas market had rapidly become their “base case” and warned that prices were likely to average above €220 p/MwH in the fourth quarter of this year. They added that a cold winter and further Russian supply cuts could “lift prices to €420 per MwH”. That would be equal to more than $700 a barrel of oil equivalent.

The UK energy sector has warned that electricity generators may also need government support. Liz Truss on Monday won the race to become leader of the Conservative party, and will on Tuesday become Britain’s prime minister.

Teresa Ribera, Spain’s energy and environment chief, said Putin was “pushing the resilience of European citizens to the limit and undermining confidence in EU institutions”.

Ribera, minister for ecological transition, said in an interview with the newspaper Expansión that “Putin has dynamited the energy market”. “It is broken and immediate intervention is needed. It is no longer working according to the normal rules and the European Union needs to act urgently to stop the Russian leader’s blackmail.”

EU energy ministers will gather for an emergency meeting on Friday to discuss measures to tame spiralling natural gas prices.

Analysts said the latest twist in the energy crisis would raise the stakes for European Central Bank policymakers, who are also set to meet this week. Several big investment banks, including JPMorgan, Bank of America and Goldman Sachs, said last week they expected the central bank to lift rates by 0.75 percentage points, the biggest increase since 1999, as it battled record inflation. While the rise in gas prices could make the inflation situation worse, it also darkened the outlook for economic growth.

“The ECB’s task is greatly complicated by uncertainty over Russian gas supplies,” said Brian Martin, head of G3 economic research at ANZ. “Moscow’s decision not to restart gas flows via the Nord Stream pipeline raises downside growth risks while increasing the inflation outlook.”

Eurozone and UK government bonds came under pressure on Monday, with the yield on Germany’s benchmark 10-year Bund adding 0.04 percentage points to 1.56 per cent and the equivalent Italian yield rising 0.1 percentage points to 3.94 per cent. The 10-year gilt yield jumped as much as 0.08 percentage points to touch 3 per cent for the first time since 2014, reflecting a sharp drop in the British debt instrument’s price. It later traded up 0.02 percentage points on the day.

US markets were closed on Monday for the Labor Day holiday, something that could reduce overall trading volumes and increase liquidity.