European Gas Prices Soar, Threatening Economic Recovery
The cost of living crisis in Europe is about to get even worse. Gas prices have surged by 45% this year, putting a significant burden on households and industries. And with Russian gas flows set to cease on January 1, the situation is likely to deteriorate further.
A Perfect Storm of Factors
Futures contracts for next year are already carrying a premium, indicating that prices will remain high for longer. This translates to bigger bills for consumers. The timing of the end of the Ukraine-Russia transit contract couldn’t be more hazardous. Europe’s gas reserves, which act as a buffer during tighter times, are depleting at an alarming rate due to cold and windless weather. This makes it challenging for traders to secure supplies for next winter.
Industrial Competitiveness at Risk
High prices are straining industrial competitiveness and economic performance, according to MET Group analysts. Delays in capacity additions or stronger-than-expected demand from Asia could further tighten the market. The loss of Russian pipeline gas would put additional pressure on an already tight gas market, driving global prices higher.
Global Prices to Remain Elevated
Energy Aspects Ltd. analysts predict that benchmark futures will remain elevated due to a lack of flexibility in the global balance. This is partly due to the difficulty in refilling storage sites by the end of October next year. Almost three years since the war in Ukraine disrupted the region’s energy market, balances remain very tight.
Europe’s Energy Dilemma
Despite efforts to diversify its sources of supply, Europe remains heavily reliant on Russia for natural gas. The region has increased its reliance on Norway and built out renewables, but prices continue to be extremely sensitive to any perceived production risk. Asia’s growing demand for LNG and China’s added storage capacity have intensified competition for the fuel.
The Human Cost
Slovakia’s Prime Minister Robert Fico estimates that European households and businesses could face an additional €40 billion to €50 billion annually in higher gas prices and another €60 billion to €70 billion a year in extra electricity costs. In the UK, the energy price cap is forecast to rise for a third consecutive time in April, posing a problem for the Bank of England as it tries to keep inflation in check.
A Slow Recovery
Europe’s economy has been slow to recover from the crisis amid uncertainty over energy costs. More stable prices would allow businesses and households to map out their spending plans. The situation is particularly difficult in Germany, where many factories have had to halt or throttle production due to high energy costs. Faster storage withdrawals are sending a foreboding signal that the strain on Europe’s largest economy could persist for a third straight year.
A Cautious Central Bank
European Central Bank President Christine Lagarde remains cautious about services inflation, despite the central bank’s efforts to unwind its unprecedented monetary tightening. While gas prices are creating some cost pressure in Europe, they are not yet at crisis levels. However, the situation remains precarious, and inflation is expected to dip below the ECB’s 2% target in 2025.
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