Global energy supply risk: Evidence from the reactions of European natural gas futures to Nord Stream announcements

Motivated by recent geopolitical challenges to globalization, finance scholarship has a growing interest in the risks to economies of key supply chains. We explore the effect of Nord Stream pipeline development on daily natural gas prices in Europe. Reviewing a comprehensive list of 24 announcements related to Nord Stream pipeline developments, stoppages, and sanctions for 2013–2022, we investigate their direct impact on the volatility and returns of Dutch TTF natural gas futures. Employing bootstrap quantile regression, we find that the effects of such announcements are highly significant, especially during periods of low TTF volatility and returns distributions. Moreover, results show that both COVID-19 and the Russia-Ukraine war strenghtened the correlation between Nord Stream pipeline announcements and TTF market reactions, consistent with energy markets pricing geopolitical risks. Results, reflective of informed trading, warn of concentration risk in European gas markets, suggesting the need for policy actions to reduce supply-chain dependence. Taken together, we support the importance of diversifying both natural gas supply infrastructures and providers to mitigate geopolitical risk exposures and associated welfare costs to the real economy.