Europe's gas prices have broken a new record. How high can they go?

There is no stopping Europe’s gas bills.

On Thursday, future gas prices on the Title Transfer Facility (TTF), the continent’s leading trading hub, reached €321 per megawatt-hour, a stratospheric figure in comparison with the €27 set a 12 months ago.

The brand new all-time high follows a surprising announcement by Gazprom, Russia’s state-controlled energy giant, who last week said it will soon shut down Nord Stream 1 – which pipes gas from Russia to Germany – for a three-day maintenance operation, performed alongside Siemens.

Gazprom argues the pipeline have to be checked for cracks, dents, leaks and other potential glitches. 

European politicians have repeatedly accused the corporate of weaponising energy flows and exploiting technical questions as an excuse for piling pressure on countries at Vladimir Putin’s will.

“Upon the completion of maintenance operations, provided that no malfunctions are identified, gas transmission will likely be resumed at the speed of 33 million cubic metres per day,” Gazprom said.

The speed barely represents 20% of the pipeline’s capability to hold as much as 167 million cubic metres day by day. The dwindling flows have forced Germany, Nord Stream’s important recipient, to trigger the second phase of its energy emergency plan and bail out Uniper, an importer of wholesale Russian gas.

But even before Gazprom took the unexpected decision, gas prices across Europe had begun a latest regular rise. By late July, the previous record high achieved in early March, shortly after Russia launched the invasion of Ukraine, was shattered. 

To date, August has seen a seemingly unstoppable rise in gas prices. 

Along with the war’s unpredictable evolution, the hotter-than-usual summer and a subsequent increase in air-con use have fuelled the upward trend, along with a severe drought that has shrunk hydropower and limited activity in nuclear plants. Wind power has too underdelivered.

At the identical time, governments are rushing to refill their gas storage ahead of the winter season, as fears of popular discontent grow by the day. The shopping spree has inevitably swollen prices, with capitals willing to foot the expensive bill.

“The following five to 10 winters will likely be difficult,” Belgian Prime Minister Alexander De Croo has warned.

While storage plays a key role in the safety of supplies, it’s removed from being a panacea for the EU’s multiple energy woes: the bloc has a capability to store over 100 billion cubic metres (bcm) of gas – 1 / 4 of its annual 400 bcm consumption.

Mindful of those shortcomings, member states have already established a plan to voluntarily reduce gas demand by 15% before next spring. The unprecedented effort is supposed to cushion the impact of a complete cut-off of Russian flows, a drastic scenario that has in recent months gone from distant to likely.

As gas prices proceed to climb, a pressing query emerges: just how high can they go?

“In theory, there isn’t any limit. The market, because it all the time does, is factoring within the worst circumstances, the worst interpretation,” Jonathan Stern, a research fellow on the Oxford Institute for Energy Studies, told Euronews.

“If Nord Stream 1 doesn’t resume flows after the three-day maintenance, there isn’t any technique to say how bad prices can go. Not less than, until we see how cold winter is – that is probably when prices will peak.”

‘Seriously supply constrained’

Speculation is an inherent a part of Europe’s energy market.

The system is today liberalised and responds to the basic dynamics of supply and demand. Through the worst months of the pandemic, when economic activity virtually ground to a halt, future gas prices on the TTF fell below the €10 per megawatt-hour, leading producers to large losses.

This was not all the time the case: before the 2000s, most gas contracts were based on a long-term perspective and linked to the worth of one other crucial fossil fuel: oil. The indexation offered certainty and stability but proved too rigid and artificial to cope with the challenges of the brand new millennium.

The market regularly moved to shorter contracts based on real-time economic trends, which resulted in lower and more competitive prices for each industry and consumers. This flexibility was deemed essential to spice up transparency and accommodate the green transition.

The switch, nevertheless, left Europe more exposed to cost volatility: as demand for gas rose, so did the bills.

Until 2022, the ups and downs were manageable. The spike experienced in late 2021 within the midst of the economic recovery received a middle-of-the-road answer from policy-makers: tax cuts, vouchers for vulnerable households and subsidies for struggling corporations.

But the choice of Russia, the EU’s important energy supplier, to invade Ukraine has stretched the liberalised system to its most extreme limits. Speculation surrounding Gazprom’s next move is rife and dictates the market’s wild ebbs and flows.

Households now grapple with impossibly expensive electricity bills, factories slash their production hours in a bid to save lots of power and governments draft plans for the dreaded possibility of gas rationing. Meanwhile, energy drives inflation to record highs, central banks rush to hike rates of interest, the euro reaches parity with the dollar and a deep recession looms over your complete continent.

“In case of a recession, our lives will likely be harder in some ways, but easier when it comes to energy. Gas demand will drop and convey prices way from where they at the moment are,” said Professor Stern.

“Nevertheless, we cannot see ‘normal’ prices anytime soon – not for at the very least for 3 to 4 years,” he added, downgrading De Croo’s ominous warning.

The continent, Stern said, stays “seriously supply constrained,” no matter recent deals with the USA, Egypt, Israel, Algeria, Azerbaijan and Canada aimed toward diversifying energy suppliers.

The newest data shows Europe imported record amounts of liquefied natural gas (LNG) from America, to the detriment of the Asian region, a standard buyer, as China undergoes a pointy economic slowdown.

But not even this excellent news has been enough to pacify gas prices. The concentrated push in favour of LNG, which offers greater variety than pipelines but entails high costs to construct coastal terminals, is excepted to take several years to totally materialise and simmer Europe’s rattled energy market.


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