Energy prices are exploding: How investors can make money from it

by Emmeran Eder, Euro on Sunday

WIntermuffel in this country can look forward to relatively mild temperatures more than before. Because they have the advantage that less heating is required. That really saves money, since the European gas price has really exploded since August. At the TTF trading point in the Netherlands, it was still EUR 45 per megawatt hour (MWh) at the end of August. It is now at just under 100 euros. In December it even rose to almost 180 euros at its peak.

There are several causes that triggered the price increase. Above all, the high demand due to the recovery of the global economy after the lockdowns should be mentioned. The demand for gas from Asia increased sharply last year, which triggered an enormous price surge. This has led to many traders buying less gas to fill up storage and stock up for the 2021/2022 winter season. “Natural gas inventories are significantly lower than normal,” says Carsten Fritsch, a commodity analyst at Commerzbank. According to the GIE, the European organization of gas infrastructure operators, the storage facilities in Germany are currently only almost 52 percent full. A level of 70 percent is normal at this time of year. The situation is similar across Europe.

However, the main reason for the tense situation in Europe is the lack of deliveries from Russia. “The Russians could increase gas production using the existing pipelines,” said Amos Hochstein, the US State Department’s special adviser on global energy security. He accuses Putin of delaying gas supplies to get approval for the controversial Nord Stream 2 pipeline. The Kremlin chief denies this.

However, several weeks ago he announced that he would supply more gas to Europe. So far, however, no deeds have followed the words. According to industry insiders, Russia is not using the capacities for gas deliveries through Ukraine. There are no production disruptions. This fuels the suspicion that Putin is using gas as a political weapon to enforce Nord Stream 2 approval.

In the second half of December, the TTF gas price then fell from 180 to 66 euros. This slide was triggered by large shipments of US liquid gas to Europe. But in the past few days, the price has recovered slightly due to the Russian troop buildup on the Ukrainian border and the threat of war.

The gas market is therefore likely to remain tense. Other influences, such as a renewed increase in demand from Asia or a severe cold snap, could quickly lead to new price increases. Investors, on the other hand, can hedge US natural gas with an ETC. The European and American gas markets are closely linked. European gas lacks an investment vehicle as the market is less liquid and more difficult to represent than its US counterpart. Investors should be aware that gas is volatile. Therefore, a purchase is only suitable for investors who are very willing to take risks.

Oil price moves in a range

The price for a barrel (159 liters) of Brent oil is significantly less volatile. It has fluctuated in a range between 70 and 86 US dollars per barrel since the beginning of June. It’s currently at the upper end of the range. In the short term, however, it is more likely to fall as the uprising in Kazakhstan was crushed by the government and the country’s oil production is back to normal. Libyan oil production has also recovered after maintenance work and strikes at some oil fields.

In the medium term, however, the price of oil is likely to climb. In December, OPEC increased oil production less than agreed. The production volume of the ten countries involved in the cut agreement was only 150,000 barrels a day higher than in the previous month. However, an increase of a good 250,000 barrels per day would have been possible. In addition, the production volume was below the agreed level despite the increase in production by 650,000 barrels per day. This shows that OPEC is finding it difficult to implement the agreed production increases. If the economy recovers after the Omicron wave subsides, there should therefore be excess demand, which will drive up the price.

The price per tonne of CO has also become significantly more expensive₂ in the EU emissions trading system ETS. Since the beginning of November, this has climbed from 55 to 85 euros per tonne. Emission rights trading is one of the instruments with which the EU intends to achieve its climate goals. The CO₂-Certificates are distributed to companies by the respective states or must be acquired by them.

A certificate allows the holder to emit one tonne of carbon dioxide. Anyone who produces greenhouse gases without possessing the appropriate number of such certificates of entitlement must expect high fines.

In the EU, the total amount of emission rights is limited by an upper limit. Starting this year, the number of certificates will be reduced by 2.2 percent annually. So far, the rate was 1.7 percent. Among other things, this further supply shortage has led to the fact that the price for emission rights has recently risen sharply. Since the rights are traded on common futures exchanges, many speculators such as hedge funds are also active in the market, who do not want to cover their pollutant emissions but want to make quick profits. They also drive up the price.

According to investigations by a Potsdam research team, the CO₂price to around 130 euros per tonne by 2030 so that the EU can achieve its climate goals. In addition, the free allocation of certificates for some segments is to be phased out. That should also increase demand.

In addition to the large number of speculators in this segment, the risks for investors lie primarily in how politicians react when companies buy CO₂– There is a threat of certificates migrating to non-regulated countries. A commitment to CO is suitable for risk-averse investors₂-Market anyway as the correlation to other asset classes is low.

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