Gas prices surged on Monday and the pound and euro slumped after Russia shut down a big pipeline indefinitely.
Russia has used its control of gas supplies to exert pressure on European countries in retaliation against sanctions imposed after its invasion of Ukraine. Gazprom, the Russian state-controlled gas company, closed the Nord Stream 1 pipeline from Russia to Germany on Friday, saying it had found a leak requiring repair.
The threatened cuts to supplies of gas from Russia have prompted a scramble by European countries to store as much gas as possible before winter, as well as efforts to find alternative supplies.
However, the prospect of Russia cutting off an important pipeline completely caused prices to increase on Monday, as investors brace for severe shortages. The contract for gas delivery next month in the UK soared by 35%, to 550p a therm. That was an increase from the 410p a therm cost on Friday afternoon, and approaching the five-month high of nearly 650p set last month.
The benchmark Dutch TTF October gas contract rose by 30%, up €62 to €272 a megawatt hour.
The threat of gas shortages has also deepened concerns over recession risks in economies dependent on the fuel for industry and electricity generation, including the UK and the EU. That has caused their currencies to weaken as investors seek safety in the US dollar and reduce exposure to an economy that may have to cut back industrial production meaningfully.
The euro on Monday hit a 20-year low against the US dollar, falling as low as $0.9879 in early trading.
On the day that Liz Truss was expected to be confirmed as the UK’s next prime minister, the pound hit $1.1444, its lowest value against the dollar since the early days of Covid-19 in March 2020. Truss is expected to reveal her plans to mitigate the energy crisis in the coming days.
European stock market indices also dropped. Germany’s Dax lost nearly 3% and France’s Cac 40 dropped 2%. However, London’s FTSE 100, whose companies tend to collect more revenues in US dollars, only fell by 1.1%.
Kit Juckes, a macro strategist at the Société Générale bank, said: “It’s unclear how long the pipeline will remain shut, but it is still obvious that President Putin is using it as a weapon to weaken European resolve in supporting Ukraine.”
Lee Hardman, a currency analyst at MUFG Bank, said: “Russia’s ongoing weaponisation of energy supplies continues to increase downside risks for European economies and the euro.”
Oil prices also jumped after reports that Opec, the cartel of oil-producing countries, said it was considering cutting production. Reuters reported that Opec members plus other large oil-producing allies including Russia will discuss potentially cutting production by 100,000 barrels a day among other options at its meeting on Monday.
The price of Brent crude oil futures, the global benchmark, rose by 2.7% on Monday morning to more than $95.50 a barrel, up from $93. Futures for West Texas Intermediate, the North American measure, gained 2.5% to hit $89 a barrel.
Leaders of the G7 countries – the UK, US, France, Germany, Italy, Japan and Canada – agreed a plan on Friday to cap the prices paid for Russian oil to prevent sales from enriching the Kremlin, although it is unclear if the cap will result in lower prices.