DTN Oil

WASHINGTON (DTN) -- After rallying more than 5% Monday, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell sharply in early trade Tuesday as investors monitored the impact of a record-breaking heatwave on European energy systems while the continent braces for a potential longer-term shutdown of Nord Stream 1, a key natural gas pipeline to Europe from Russia.

The European Commission on Tuesday said it doesn't anticipate Nord Stream 1, a 55 billion cubic meter gas pipeline, to come back online after being shut for 10 days of routine annual maintenance earlier this month. The line is scheduled to restart on Thursday, July 21.

"We are working on the assumption that it doesn't return to operation. And in that case certain additional measures need to be taken," stressed Johannes Hahn, EU budget commissioner.

On Monday, Gazprom, Russia's state-owned energy giant, declared force majeure on several European natural gas buyers citing "past and current shortfalls in gas deliveries," according to German utility Uniper. A second German utility, RWE, confirmed that it received a similar notice but declined to comment on details or the company's legal position.

A halt of Russian gas supplies to the European Union could shed 1.5% in gross domestic product this winter, according to estimates from the European Commission, while having a catastrophic impact on energy-intensive industries like steel production and agriculture.

The European Commission is due to unveil Wednesday a plan for coordinated gas demand reduction to mitigate the impact of a potential cutoff by Moscow.

This comes at a time when much of the European continent is battling a record heatwave that has already disrupted transportation and power grids in some EU countries. In the United Kingdom, where temperatures climbed above 100 degrees Fahrenheit overnight, many businesses closed early, and employees were advised to remain at home so as not to risk heat exposure.

At least five EU countries have declared states of emergency or red warnings as wildfires, triggered by extreme temperatures, burn across France, Greece, Portugal and Spain. In the past week, more than 31,000 people have been displaced from their homes because of wildfires in the Gironde region of southwestern France.

For energy systems, scorching heat means a greater threat for deeper disruptions for power generation, as nuclear operators struggle to keep their plants cool and natural gas stations run less efficiently. With higher temperatures, supply may not be sufficient to meet demand in addition to restocking required ahead of next winter.

German day-ahead power prices rose to 397 euros per megawatt-hour, the highest since March, while the French equivalent climbed to the highest since April at 521 euros.

At the beginning of the week, the oil complex got a leg up from comments by senior Saudi officials who indicated that there would be no immediate boost in production following U.S. President Joe Biden's first trip to the Middle East as president.

"The decision to increase oil production is within OPEC+ and should follow the policies of keeping the markets balanced not a particular agreement," said Saudi State Minister of Foreign Affairs Adel Al-Jubeir on Saturday, July 16.

U.S. officials have confirmed they do not expect Saudi Arabia to immediately boost output and now await the outcome of OPEC+ meeting on Aug. 3, which will include Russia. Riyadh made it clear the kingdom was sticking with the alliance.

OPEC+ spare capacity remains low, according to analysts, with most producers currently pumping at their maximum rate. It's unclear how much extra oil production Saudi Arabia could bring to the market in the short term.

At its last meeting on June 30, OPEC+ greenlighted an increase in its output target of 648,000 barrels per day (bpd) for August, ending record production cuts agreed to in April 2020 at the height of the pandemic to counter collapsing demand. The alliance gave no indication on what their next step in production policy would be. Saudi's long-term growth plan calls for oil production capacity to increase to 13 million bpd from about 11 million bpd currently.

Near 7:30 a.m. EDT, West Texas Intermediate August contract dropped more than $2 to $100.61 barrel (bbl). Brent crude futures for September delivery fell below $105 bbl, down more than $1.80 bbl. NYMEX August RBOB futures declined 4.18 cents to $3.2182 gallon, while front-month ULSD slumped 13.72 cents to $3.5191 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com