- Europe's energy crisis is worsening and Bank of America analysts say they see "no end in sight."
- Supply constraints, weather, uncertainty from Russia, and Europe's own policies have made a perfect storm.
- "This will be a multi-year challenge," a portfolio manager told Insider.
It's not just Russia's weaponization of energy that's hurting European markets. A perfect storm has hit the continent and led Bank of America analysts to conclude there's "no end in sight" for the worsening energy crisis.
The tumult reached new levels last week, with gas and power prices soaring to fresh records Friday.
However, Dutch TTF futures, the European benchmark for natural gas, dipped to 268 euros per megawatt hour on Monday after hitting a record 340 euros last week. Prices remain more than 1,000% higher than a year ago.
Moscow's Gazprom is set to shutter Nord Stream 1 this week for a three-day maintenance, even though the utility giant already slashed flows to 20% of capacity.
"Last week Europe awoke to a bitter truth: the energy crisis is here to stay," Bank of America analysts wrote in a Monday note.
As natural gas prices soar, electricity prices have mirrored those gains. German baseload power, the benchmark European electricity price, is trading more than 1,400% above its average from 2010-2020.
"It's going to take a few years to get enough infrastructure in place to get Europe in a spot where natural gas prices could be considerably lower," Rob Thummel, portfolio manager at energy investment firm Tortoise, told Insider. "The futures curve still has very high prices well into next year."
Weather concerns
As if soaring prices weren't trouble enough, weather has also emerged as an unpredictable variable in the crisis.
Declining river levels in Europe — Germany's Rhine River, in particular — have led to added barge traffic, BofA analysts said.
Extreme heat waves have hit water levels throughout the summer, which limits shipments of coal and other refined products, and also curtails hydro-electric power generation.
"Unfortunately, several nuclear reactors have also suffered due to low river levels, which have limited their ability to cool reactor cores and forced them to dial back operations just when their power is needed most," the analysts wrote.
"The near-term concern is whether Europe runs out of natural gas to heat homes during the winter," Thummel said, echoing UBS's forecast that a recession is a likely outcome for Europe.
Alternative energy and policy
With dwindling resources, at-risk nuclear power capacity, and soaring energy costs, policymakers are moving to revive coal power plants after spending several years actively shutting down coal activity for climate initiatives.
According to BofA, coal-fired power generation has climbed 67% since Russia invaded Ukraine.
"Before the war, Europe had wanted to be a leader in decarbonizing, and that's worked out to a certain extent with wind and solar, but they made a choice to place significant reliance on Russia," Thummel said.
He noted that, after years of under-investment, coal is more expensive now and harder to access. But Europe has little choice other than to fire up old plants because that offers a quicker solution than trying to build entirely new natural gas facilities.
"They didn't build the infrastructure to import LNG from elsewhere like the US, and now they're stuck relying on an unstable source," he said.
In his view, Europe will require several years to build up the infrastructure to get out of the energy crisis.
Meanwhile, Bank of America noted that the world's two largest coal importers, China and India, have rushed to ramp up domestic supplies, heightening competition for the dirtiest fuel even as global production has faltered.
'No end in sight'
To Thummel, the biggest two variables to watch are whether Russia decides to fully cut off natural gas supplies to Europe, and how severe the cold weather is during winter.
"There's a scenario where Europe really runs out of natural gas in a really cold winter, and Russia fully cuts off supplies," he said. "That would be a humanitarian crisis."
But even if Europe can build up its energy stockpiles enough to endure winter without a snag, nations will then have to play-catch up for years to come, he added.
Bank of America maintains a similarly bleak outlook: "With the war in Ukraine becoming increasingly entrenched, the European energy crisis seems to have no end in sight."
