- End of Russia-Ukraine transit will add strain to tight market
- Higher prices set to last longer with futures showing premium
European gas prices are up about 45% this year, adding to the burden on households and industry as they strive to recover from the worst cost-of-living crisis in decades. There’s likely to be more to come with Russian gas flows due to cease on Jan. 1.
Futures contracts for next year are already carrying a premium, a strong signal that prices are poised to remain higher for longer, which ultimately translates into bigger bills for consumers. Some traders put the impact of no flows at as much as €10 a megawatt-hour higher than if flows continue.
he timing of the end of the Ukraine-Russia transit contract looks hazardous. The region’s gas reserves, a buffer for tighter times, are getting depleted at a faster-than-normal pace due to periods of cold and windless weather, which can make it trickier for traders to secure supplies for next winter. The weather is set to turn colder, potentially increasing gas demand for heating.
“High prices inevitably strained industrial competitiveness and economic performance,” MET Group analysts said in a note on Monday. Looking forward, “delays in capacity additions or stronger-than-expected demand from Asia – driven by economic recovery or cold weather – could tighten the market.”
Read More: Ukraine-Russia Gas Transit Deal At Critical Moment of Truth
European Gas Prices Remain Elevated
Benchmark futures have increased about 45% this year
The 15 billion cubic meters of gas that Russia currently sends through Ukraine each year make up less than 5% of Europe’s overall needs. Still, though it has been clearly signaled, losing one of the last remaining routes for Russian pipeline gas would put more pressure on an already tight gas market and propel global prices higher, Energy Aspects Ltd. analysts said in a note this month.
Their base case is for benchmark futures at the Title Transfer Facility virtual trading point in the Netherlands to remain elevated. That reflects a “lack of flexibility in the global balance,” due to factors including the difficulty in refilling storage sites by the end of October next year.
Almost three years since the war in Ukraine upended the region’s energy market, sending prices soaring, balances remain very tight. Europe has worked to diversify its sources of supply, buying more seaborne cargoes, increasing its reliance on Norway and building out renewables. Still, prices have continued to be extremely sensitive to any perceived production risk, particularly at a time when Asia has been boosting LNG purchases as extreme heat waves become more frequent, and top-importer China has added storage capacity, intensifying competition for the fuel.
At the weekend, Slovakia’s Prime Minister Robert Fico, whose country is highly dependent on Russia for natural gas, estimated that European households and businesses could face an additional €40 billion to €50 billion ($42 billion to $52 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, which represents an annual bill for a typical household and is largely a reflection of wholesale power and gas prices, 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.
Last week, European Central Bank President Christine Lagarde said in an interview that the central bank is close to reaching its 2% inflation target, but remains cautious about services inflation. The comments come at the end of a year in which Lagarde and her colleagues began unwinding their unprecedented monetary tightening.
“Gas across Europe is now a little dearer, creating some cost pressure in Europe, but nothing like what we saw during the energy crisis,” said Jamie Rush, chief European economist at Bloomberg Economics. “We still expect inflation to dip below the ECB’s 2% target in 2025.”
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