Winter Gas Price Shock Looms Over Europe
As the mercury drops, Europe’s industries are bracing themselves for a harsh winter ahead. The specter of depleted gas stocks, intense competition with Asia for liquefied natural gas, and potential supply disruptions from Russia are all combining to create a perfect storm.
A Fragile Recovery
Since the energy crisis of 2022, dozens of European firms have been forced to close factories and slash jobs as high gas prices eroded their competitiveness. Many are still operating at reduced capacity, with far-reaching implications for the continent’s sluggish economic growth. European Union gas demand remains 17% below pre-pandemic levels, while prices are at their highest point in over a year.
Nervous Energy
The impending expiration of a Russian transit deal to supply gas to Europe via Ukraine has sparked jitters among industry leaders. Francisco Blanch, head of commodity and derivatives research at Bank of America, predicts EU gas prices could surge to 70 euros/MWh next year, up from nearly 50 euros/MWh currently. This would be a devastating blow to European industries already struggling to stay afloat.
Stockpiling Concerns
EU-wide gas inventories are 85% full, 10 percentage points lower than last year. This has raised concerns about the ability to meet demand during cold snaps, which could lead to rapid storage depletion. The European Commission has responded by increasing its storage filling target, potentially adding to the upward pressure on prices.
Shrinking Industries
The impact on European industries has been stark. Dozens of factories have closed, and nearly a million manufacturing jobs have been lost over the past four years. Former ECB chief Mario Draghi has warned that the loss of relatively cheap Russian gas has exacted a “huge cost” on the economy.
Competitiveness Crisis
European companies are facing electricity prices 2-3 times higher than those in the United States, while natural gas prices are 4-5 times higher. This has led to a competitiveness crisis, with many firms considering relocation abroad. Yara’s CEO has announced plans to shift the company’s energy exposure away from Europe, citing high energy prices as a major factor.
Industry Warning
German industry lobby group BDI has sounded the alarm, warning that high energy prices and unreliable supplies are threatening the competitiveness of Europe’s largest economy. French industries expect to operate at reduced capacity this winter, while EU storage levels are expected to be covered mainly by imports of liquefied natural gas, further intensifying competition with Asia.
A Chilling Prospect
As Europe heads into the winter months, the prospect of a gas price shock looms large. With industries already reeling from high energy costs, the impact on the continent’s economic growth could be severe. One thing is certain: the coming winter will be a critical test of Europe’s resilience in the face of uncertainty.
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