As the energy crisis eases, European natural gas prices drop to an 18-month low

The price of European natural gas has fallen to its lowest level since Russia’s invasion of Ukraine. This is good news for the EU and UK economies, and it also helps to defeat President Vladimir Putin’s war efforts.

Friday’s benchmark gas price fell below EUR50/MWh for the first time in nearly 18 months. It was EUR48.90/MWh. This results from traders reporting growing confidence that European countries will not suffer from shortages this winter. In August 2022, the gas benchmark peaked at more than EUR300/MWh.

Mild weather, ample storage, and efforts to source alternate supplies have helped European gas prices to plummet by as much as 85 per cent since August 2022, when huge cuts in Russian supplies caused alarm about possible blackouts.

Henning Gloystein of consultancy Eurasia Group said that Europe “looks like it has successfully weaned herself off Russian gas.” He said that while gas is still expensive, it doesn’t mean there are any shortages.

Putin has suffered a setback with the price return to 2021 levels, just before the first anniversary of the war in Ukraine on February 24, 2019.

Moscow’s energy income has plummeted, having soared in the initial aftermath of the invasion. This helped to finance the Kremlin’s military offensive. Russia’s oil is now selling at a deep discount, and gas prices are not high enough to make up for its drop in export volumes.

Also, the fall in gas prices has sparked hopes that EU countries and Britain will experience a mild recession or even avoid an economic contraction. According to the European Commission, the short-term prospects of the EU have been boosted by the price drop and increased household spending.

As suppliers have already hedged electricity and gas for consumers at higher prices, household bills will not fall as quickly. However, bills should fall due to the drop in wholesale prices. Inflation has been rising since Russia had to cut supplies in 2021 due to high gas prices. In retaliation to western support for Ukraine’s invasion, Moscow cut exports.

Although prices remain high compared to historical levels of EUR10-30 per megawatt hour, analysts stated that they do not threaten to cause a deep recession in Europe.

Last summer, gas prices were so high that they were almost $500 per barrel but have fallen to $85 per barrel.

Gas infrastructure Europe reported that Europe’s gas storage levels, which are one of the most important metrics to avoid shortages, were at 66% full by Wednesday. This is well above the normal levels for this time of year.

Gloystein stated that Europe’s industrial gas demand has dropped by around 20% in the last year without significantly reducing manufacturing output due to greater efficiency and fuel switching.

Forecasts for the long term now indicate a mild March, which should lower heating demand. Analysts believe that this should make it easier to refill storage before next winter, even if Russia’s supplies are lower than at the beginning of 2022.

They also pointed out the likely return of the Freeport LNG export terminal on the US Gulf Coast as a source for renewed supplies to market. This terminal provided approximately a fifth of US export capacity before an outage last year.

Tom Marzec Manser from ICIS consultancy warned that the fall in gas prices could start to fuel demand for gas in Asia. This is especially true as China’s economy opens up.

He stated that while storage levels in Europe and Asia are not high, Asia does not appear to be trying to outcompete the Atlantic in cargoes. However, falling prices will undoubtedly rekindle some demand for gas in the power and industrial sectors.

“This means that even though the TTF [benchmark] price is falling, it is unlikely that wholesale gas prices will fall back to pre-Covid levels.

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