Reuters reported earlier this week that a number of power forward contracts traded in the EU hit highs because of what increasingly looks like a perfect energy storm, affecting every energy source in one way or another.
"A number of factors are adding up: The market is uncertain about whether (French utility) EDF will increase nuclear availability enough for winter, which explains the price differences between the two countries [France and Germany]," Rystad Energy analyst Fabian Ronningen told Reuters.
EDF has had to significantly reduce the capacity utilization rate of its nuclear power plants because droughts in France have reduced water availability for cooling the reactors. But the drought came on top of earlier problems: reactor corrosion that prompted the utility to close some of them earlier this year, effectively reducing the supply of electricity available for sale on the domestic or regional market.
Meanwhile, in Germany, wind output is low, and so is the water level of the Rhine—a key transport route for things like coal, for example. Germany's economy is quite dependent on this crucial shipping corridor, but when the water level is critically low, shippers simply cannot load the usual volume of cargo, meaning that coal and other commodities are reaching their destinations in smaller mounts and more slowly.
The drought is also affecting hydropower output, adding to worries about future supply. Because of the drought, Norway, which generates more than two-thirds of its electricity from hydropower, announced it would curb electricity exports, threatening supply for other European countries at the worst possible time. In the UK, there's talk about blackouts.The current water levels on the Rhine River, a major inland infrastructure transit artery across Germany, are exceptionally low and have made certain parts of the river impassible by barge. Falling waters have already disrupted the flow of commodities and are exacerbating Europe's energy-supply crunch.
The alarming lack of water is contributing to a possible oil supply shock at Germany's largest oil-processing complex located on the banks of the Rhine, which is operated by Shell Plc.
Shell didn't reveal how much output it cut at the refining facility, which makes fuels, heating oil, and petrochemicals. However, data shows that the refinery can process upwards of 17 million tons of crude oil per year, or approximately 345,000 barrels a day.
The refinery and chemicals plant is located on the Lower Rhine and outside Cologne. It's downstream from the highly monitored Kaub chokepoint that is at 35 centimeters (13.8 inches) -- water levels below 40 centimeters (15.7 inches) indicate shippers find it uneconomical to operate barges past the point to Upper Rhine.
Shell's production cut underscores the severity of dropping water levels on the waterway, amplifying an energy crisis due to Europe's sanctions on Russia.
We outlined last month how falling water levels on the Rhine would make things worse for the largest economy in Europe. Supplies of crude products are running low across the country. Austrian oil and gas firm OMV AG warned two weeks ago that Germany saw a run on diesel and heating fuels.
The writing is on the wall for Europe in terms of this coming winter – It's going to get ugly. With natural gas imports from Russia cut by 80% through Nord Stream 1 along with the majority of oil shipments, the EU is going to be scrambling for whatever fuel sources they can find to supply electricity and heating through the coming winter. Two sources that were originally suggested as alternatives were Iran and Venezuela.
Increased Iranian oil and gas exports to the west are highly dependent on the tentative nuclear deal, but as Goldman Sachs recently suggested, such a deal is unlikely anytime soon as deadlines on proposals have not been met and the Israeli government calls for negotiators to 'walk away.'
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