Europe's Expectations Fall Short: Gas Prices Remain High and Continue to Rise Before the Heating Season
Europe’s hopes for a reduction in gas prices have not materialized. Prices remain high and are climbing even before the heating season begins. A complex set of factors influences this trend, and in the worst-case scenario, prices could exceed $1,000 per thousand cubic meters. However, this market turmoil might provide an opportunity to launch the remaining operational line of Nord Stream 2.

Gas Prices Surge Early
Gas prices in Europe started to rise before the heating season. In September, the average price on Europe’s largest gas hub, TTF, was $422 per thousand cubic meters. By October, prices had increased by 10% to $463, according to Open Oil Market data. For comparison, during the first half of the year, prices averaged around $310. Futures for gas delivery in the coming months continue to climb.

“The rise in prices was unexpected because many in Europe anticipated a decline to around $300 during the off-season in September and October,” explains Igor Yushkov, an expert at the National Energy Security Fund and the Financial University under the Government of Russia. “This pattern was observed in early spring when gas prices in Europe fell to $270 per thousand cubic meters during another off-season.”

Unexpected Autumn Trends
Instead of the anticipated price drop, autumn brought new challenges. Why is Europe once again facing high gas prices and a potential surge in inflation?

Geopolitical and Supply Risks The price jump partly stemmed from risks associated with Ukraine’s military actions in the Kursk region, through which a key gas pipeline to Ukraine runs. “Prices spiked from $360 to $480 in a single day due to fears of transit disruptions near Sudzha caused by the conflict,” notes Yushkov.

Storms and LNG Disruptions This week, prices have risen due to potential cuts in LNG supplies from the U.S., where Hurricane Raphael forced evacuations from oil and gas platforms. Additionally, calm weather in Europe has reduced renewable energy output, increasing reliance on gas. Bloomberg models predict a sharp drop in wind generation in Germany, leaving gas-powered plants to fill the gap.

Moderate Heating Demand While heating demand remains subdued due to mild temperatures, gas storage facilities in Europe are nearly full (95%), which has so far helped contain price increases.

Key Factors Shaping the Market
Weather Uncertainty Temperatures play a critical role. The last two winters in Europe were unusually warm, but there is uncertainty about what this winter will bring. If temperatures drop significantly, prices could stay elevated or spike.

Ukrainian Transit Risks Another major factor is the uncertainty surrounding gas transit through Ukraine, especially with the transit agreement expiring in January 2025. Market players are already buying futures to hedge against potential disruptions.

Asian Competition Intense competition with Asian buyers for LNG also affects prices. “If Asian demand rises, they can outbid Europe for LNG supplies, forcing Europeans to increase their offers,” Yushkov explains.

Sanction Policies Talks of a 15th EU sanctions package targeting Russian LNG add tension. “If Europe bans Russian LNG outright, even with a delay until late 2025, prices will inevitably jump,” warns Yushkov. Losing access to Russian LNG would intensify the struggle with China for supplies from the U.S., Algeria, Qatar, and Australia.

The Worst-Case Scenario
A harsh winter, combined with limited transit through Ukraine and fierce competition for LNG, could drive prices above $1,000 per thousand cubic meters. In such a “perfect storm,” Europe might have to turn to measures like activating the undamaged line of Nord Stream 2, which has a capacity of 27.5 billion cubic meters annually.

In the past, Europe has resorted to similar emergency solutions. During a severe winter in the late 2010s, Germany temporarily maximized usage of Nord Stream 1 under the pretext of testing its capacity. “If faced with an extreme situation this winter, Germany might consider a similar move to activate Nord Stream 2, citing technical or safety checks,” suggests Yushkov.

Implications for Ukraine
The risks are even higher for Ukraine, which has insufficient gas reserves. Severe frost late in the heating season could lead to genuine shortages, forcing authorities to ration heat and electricity, particularly for industrial consumers.

Economic Consequences
Even if Europe avoids a complete gas shortage, the economic impact of high prices could be significant. Rising energy costs will increase inflation, strain household and industrial budgets, and slow economic growth.

While Europe is better prepared with higher storage levels and reduced gas consumption, its energy future remains vulnerable to geopolitical, weather, and market forces.





Translated using ChatGPT.


Source:   https://vz.ru/economy/2024/11/6/1296361.html