Market Extra: European natural-gas prices drop to levels not seen in more than a year as first anniversary of Russia-Ukraine war approaches


European natural-gas prices fell to a level not seen more than a year on Friday, with warmer winter temperatures and stockpiles amassed across the region helping drive down the cost of the commodity.

The March futures contract was trading at €48.95 per megawatts hour, or MWh, on Friday, under €50 for the first time since around August 2021, based on the bloc’s leading gas benchmark, the Dutch Title Transfer Facility

It’s a scene few might have expected following Russia’s invasion of Ukraine nearly a year ago. The fallout of war sent gas prices at one point last summer to a record above €300 MWh, sparking fears of blackouts. In retaliation for sanctions imposed by the bloc and other Western allies over the invasion, Russia has slashed its natural gas supplies for Europe to a trickle.

While months of a brutal war that shows no sign of ending soon have made for a miserable winter in Ukraine, fears of Europeans freezing in their homes have dissipated. That’s thanks to milder temps and EU efforts to cut back on usage that have aided in ramping up stockpiles.

Germany, a country that has historically been heavily dependent on Russian supplies, rapidly built several floating liquid natural gas (LNG) terminals in recent months to help source supplies from elsewhere, such as the U.S. and Gulf countries.

Read: Inside Germany’s industrial-sized effort to wean itself off Putin and Russian natural gas

“Without the sharp reduction in Russian gas deliveries, Europe would now likely be enjoying above-average growth rates due to the post-COVID-19 rebound, instead of suffering near stagnation. But at least Europeans have been able to avoid the worst outcome: outright gas shortages necessitating forced cutoffs, which would wreak havoc on the economy,” Salomon Fiedler, economist at Berenberg, told clients in a note.

Fiedler said that as of Feb. 14, EU gas storage was 65% full, near the
maximum for the time of the year and 19 percentage points higher than the average versus 2015-20. The economist said Europe should survive next winter as well, providing a few variables remain stable.

“The [above] chart shows that, if worst came to worst, a combination of no Russian supplies, colder weather and significantly reduced [gas consumption] savings – of only 10% – would expose the EU to a risk of shortages next winter,” said Fiedler, who noted that Russia deliveries now account for 9% of EU supplies, down from 40% to 50% in the past.

Edoardo Campanella, economist at UniCredit, agreed that for now, the situation looks favorable for Europe, as he noted a 50% fall in natural-gas prices since November.

“The gas consumption savings made possible by favorable weather conditions have led to exceptionally high storage levels that will provide a crucial buffer next winter,” Campanella told clients in a note. But he agrees that the bloc needed to avoid slipping into complacency over energy supplies.

Also see: The hangover: Energy crisis has left Britain’s pubs feeling hammered

“Despite high stocks, if weather patterns normalize in winter 2023-24, demand cuts will be more challenging, making competition with China over LNG supply more intense. This will likely put some upward pressure on prices from what futures are currently pricing,” he said, referring to China’s emergence from its pandemic lockdowns that the country announced late last year.

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