European energy markets are changing - fast
European gas prices hit record figures even before Russia’s invasion of Ukraine. Low inventories and a colder winter than usual combined with the region’s intensifying efforts to curb carbon emissions by burning more gas for power instead of coal, sent the Dutch TTF (Title Transfer Facility) natural gas benchmark from just below €20/MWh to record highs of near €100/MWh by the end of 2021. Before 2021, TTF prices had never traded above €40/MWh. With Russia continuing to reduce gas supplies to Europe, prices have soared to over €300/MWh. The extreme price actions make sense. Europe relies heavily on Russian fossil fuels to fulfil its energy needs, sourcing almost 40% of its natural gas, 45% of its coal, and 25% of its oil from Russia.
It will take significant visible signs of relief in global energy supplies for this to change.
As the EU presses ahead with the full ban of Russian oil imports by the end of the year, and the flow of Russian gas into the EU remains largely turned off, investments in both renewable and traditional energy assets will likely gain pace. The long-term basis for investing in natural gas for European markets received major support in July 2022, when the European Parliament backed EU rules categorizing investments in gas as climate friendly. The new rules are likely to become law, which will add natural gas to the EU taxonomy rulebook from 2023, allowing investors to label their investments there as green.
The recent geopolitical events in Europe will have some bearing on the dynamics of other natural resource strategies in Europe. Ukraine is a significant exporter of cereal crops to the UK and EU, and while it looks likely that production will be cut severely, this will also depend on the duration of the conflict. We expect this to have a domino effect on livestock farmers who use corn and other cereals in their feed, thus some may turn to soymeal, which will inevitably raise prices for this commodity, too.
All things considered, we expect European natural resources AUM to reach $21bn by the end of 2027, compared with $13bn at the end of 2021 (Fig. 7.1). This represents a CAGR of +7.9%, which is much higher than the -3.6% CAGR from 2018 to 2021, but substantially lower than the rate achieved between 2015 and 2018 (+26.4%).