Gas prices in Europe have fallen to their lowest level since the start of the energy crisis, fueling hopes of a stronger economic recovery as energy pressures ease.
The European benchmark TTF hit a low of €35.20 per megawatt-hour on Friday, a level last seen in July 2021 as Russia began squeezing Europe’s energy supplies ahead of its invasion of Ukraine. It subsequently increased slightly to close the week at €35.95. The benchmark TTF peaked at over €340/mWh last summer after Russia cut gas exports to Europe, fueling inflation and sending energy bills soaring.
The drop towards €35/mWh has reinforced the idea that energy prices are returning to normal after Europe it successfully tapped alternative gas sources, accelerated the rollout of renewables, and benefited from a mild winter that left gas storage sites overflowing for the time of year.
Oil prices have also fallen, with Brent crude falling to nearly $75 a barrel after trading above $100 a barrel for much of last year, returning to roughly the level it traded at before the invasion of Ukraine.
Morgan Stanley analyst Martijn Rats said Europe was now able to supply its gas storage sites – crucial to meeting winter demand – to 100% capacity even if Russian supplies were to drop to zero.
He said prices were now falling to slow the arrival of seagoing cargoes of liquefied natural gas that Europe was quick to secure last year to replace Russian flows.
“There is not enough room in storage capacity in Europe,” Rats said, noting that storage was already at 60 percent capacity. That compares with about 35% at the end of winter last year.
“At some point, the influx of LNG will need to slow down to prevent inventories from overfilling.”
Falling energy costs have helped soften the inflation outlook, allowing central banks to slow the rate of interest rate hikes. The European Central Bank raised interest rates by a quarter of a percentage point this week, a change after a series of larger hikes.
However, gas prices still remain high compared to historical levels. In 2019 the TTF averaged below €15 and the pre-crisis peak of prices was €29.17 in 2018, which even adjusted for inflation is still slightly below the current value of prices.
Gas traders and analysts who gathered at the annual Flame conference in Amsterdam this week warned against complacency, warning that Europe could still face challenges this coming winter.
“We succeeded thanks to a mild winter and Chinese demand [for LNG cargoes] was down . . . it’s luck,” said James Watson, general secretary of Eurogas, an association that represents the wholesale, retail and distribution sectors.
“Is this the strategy we will have now? We will have to be lucky for three, four years in a row to balance supply and demand. It’s not the right way to proceed.”
The International Energy Agency, in its recent quarterly gas market report, said the balance between global gas supply and demand “is subject to an unusually wide range of uncertainties” this year, ranging from conditions weather conditions, the availability of LNG and the possibility of further reductions in the Russian pipeline to Europe.
The remaining Russian pipeline through Ukraine and Turkey now accounts for less than 10% of Europe’s gas imports compared with around 40% before the invasion, but traders believe their loss could still trigger another price hike.
Gas markets reflect some of these risks; TTF contracts for winter delivery are still trading above €50/mwh and could rise further if the weather is less mild than last winter or if Asia competes harder to deliver LNG.
“There are many other things that could happen,” a senior trader said on the sidelines of the conference, warning that while they were unlikely to reach last summer’s heights, they “could definitely come back” to €150/mWh.
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