Natural gas prices have more than doubled since their March low, driven by escalating geopolitical tensions and increasing seasonal demand.
Despite this surge, prices remain far below the record highs reached during the 2022 energy crisis.
Factors Driving Gas Prices
As winter approaches, colder weather and uncertainty around supply are pushing demand higher. Geopolitical tensions, particularly the ongoing conflict between Russia and Ukraine, are adding to market jitters. Recent disruptions include Russia halting gas deliveries to Austria over a dispute between Gazprom and Austria’s OMV. Compounding this issue, Ukraine has signaled its intention to end its transit contract for Russian gas by the end of this year, potentially affecting gas flows to Hungary and Slovakia.
Doubling of Gas Prices Since March
In March, wholesale gas prices hovered around €24 per megawatt-hour. Yesterday, prices surged to €48 per megawatt-hour. While this increase will likely lead to higher energy bills for consumers with variable contracts, it pales compared to the 2022 panic-induced peaks of over €330 per megawatt-hour.
The current price rise is driven by higher consumption during cold spells and persistent concerns over supply stability. However, thanks to improved gas storage and alternative supply sources, the situation is less dire than last year.
The Role of LNG
Before 2022, Russia supplied nearly 40% of Europe’s gas. Following Europe’s move to reduce dependence on Russian energy, liquefied natural gas (LNG) has emerged as a critical alternative. LNG tankers from the U.S. and other countries have helped fill the gap, with nations like the Netherlands and Germany expanding terminal infrastructure to accommodate increased deliveries.
Despite these efforts, Europe is not yet fully independent of Russian gas. Supply disruptions from Russia still impact prices, and LNG has its vulnerabilities. For instance, when Asian markets offer higher prices, LNG shipments may be redirected, potentially leaving Europe short of vital supplies.
Well-Stocked Gas Reserves
Europe has made strides in preparing for winter. Gas reserves are currently 91% full, well above historical averages. According to Entsog, the European Network of Transmission System Operators for Gas, even a complete halt in Russian gas supplies would leave reserves at approximately 40% by April 2024, providing a strong foundation to replenish stocks for the next heating season.
The EU aims to maintain reserves above 30% after winter to ensure resilience against unexpected shocks such as severe cold, LNG supply issues, or a total Russian cutoff.
Lessons from 2022 and Future Outlook
While the risk of another energy crisis remains, Europe is better positioned than during the 2022 crisis. Structural improvements, such as expanded LNG infrastructure and diversified supply sources, provide a buffer. Moreover, consumer behavior has shown flexibility; during the 2022 energy crisis, gas consumption across Europe dropped by 30% as households and businesses responded to soaring prices by cutting back.
This winter, higher prices may again incentivize reduced consumption. Combined with robust reserves and strategic planning, these measures are expected to stabilize the market and avoid the extremes of the previous crisis. However, ongoing geopolitical and market dynamics will require vigilance as Europe navigates its energy future.
