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Europe on the Brink of an Energy Crisis that Could Trigger Recession

European countries depend on Russia for approximately 40% of their gas imports, but Russia could cut gas supply as retaliation for sanctions imposed by Europe over Russia’s invasion of Ukraine. Since the war began at the end of February, Europe has dealt out a series of sanctions against Russia in an attempt to reduce its dependency on Russian energy. However, it's an extremely time-consuming and costly process that has left Europe dealing with an unprecedented energy crisis. Gas prices have skyrocketed by 129% since the beginning of the year. UK and Dutch wholesale prices soared on Monday with Dutch TTF Gas Futures rising over to €159.50 per megawatt-hour, while the UK equivalent traded 15% higher.

The goal is for Europe to cease using Russian energy by 2027, giving it 5 years to develop alternative sources. However, Europe continues to depend on Russia in the meantime, so a threat on the supply of energy has triggered a surge in prices. This, coupled with high inflation figures and interest rate hikes, has the Eurozone on the brink of a recession.

Traders appear to be resilient though as the EUR/USD gathers momentum and reaches the highest level in almost two weeks. Currently trading at 1.0250, the currency pair is set to face strong resistance at 1.0270.

EURUSD - 19.07.2022.jpg

But it is yet to be seen whether the EUR is capable of weathering the incoming storm. Europe is becoming increasingly worried that Russia will completely shut down its gas supply to the continent. These worries were amplified when the Nord Stream pipeline was shut down for maintenance until July 21st. Technically, pipeline operations are meant to resume this Thursday, but many doubt that gas flow will be restored after the maintenance is complete. In addition to this, Russia’s predominantly state-owned energy giant, Gazprom, is threatening to tighten its supply of gas to Europe.

Yesterday, the company claimed that it will not be able to fulfill its contractual obligations due to unforeseeable circumstances. Theoretically, a force majeure claim absolves a party from incurring penalties if they default on their obligations. However, in this case, Germany is not convinced. They have rejected Russia’s force majeure claims on past and current shortcomings.

But while Russia’s claims appear to be made up, the European continent is experiencing some real force majeure consequences of climate change. More than 5 European countries declare a state of emergency or issue warnings as wildfires blaze through Spain, Portugal, France, and other countries. The wildfires have been triggered by an intense heatwave that has been hitting Western Europe for the past couple of days. If the gas supply comes to a halt this week, it would be happening at the worst possible time. The heatwave triggered a huge increase in the demand for natural gas as it is used to produce electricity, which in turn, is used to cool down households, businesses, and others.

Though, not all hope is lost. According to Henning Gloystein, "Although power consumption in the EU will be a bit higher this week amid the heatwave due to high usage rates of aircon units, this will be offset by record supply of solar power generation."

Traders will be keeping an eye out for the developments surrounding the energy crisis and the ECB’s interest rate decision to be released on Thursday 21st July.

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