European businesses, already strained by challenging economic conditions, are preparing for another shock as gas prices are expected to soar this winter. The situation raises concerns over depleting reserves due to cold weather, intensified competition with Asia for liquefied natural gas (LNG), and potential disruptions in Russian supply.
Lingering Effects of the 2022 Energy Crisis
The energy crisis of 2022 saw gas prices in Europe spike to nearly €350 per megawatt-hour (MWh), forcing numerous companies to shutter factories, scale back production, and lay off workers. The high costs eroded the competitiveness of European industries, many of which are still struggling to recover.
This winter, many firms remain cautious, maintaining low gas consumption and restricting production activity. These measures are compounding the already sluggish economic growth in Europe. According to recent data, gas demand across the EU is 17% lower than the average recorded during the five years prior to the COVID-19 pandemic.
Rising Gas Prices and Economic Concerns
Gas prices in Europe have reached their highest level in a year, and analysts predict further increases. Svein Tore Holsether, CEO of fertiliser manufacturer Yara, expressed his concerns:
“We are worried that lower energy prices compared to 2022 are leading to complacency. It is important to remember that prices are still significantly higher than in key regions like the United States, the Middle East, or Russia.”
Adding to the uncertainty is the looming expiry of a key agreement on Russian gas transit through Ukraine at the end of the year. This has prompted buyers to rush into securing contracts, further driving market anxiety.
Francisco Blanch, head of commodities and derivatives research at Bank of America, forecasts EU gas prices could climb to €70/MWh next year, up from around €50/MWh currently. For context, the average EU gas price in the five years preceding the pandemic was €17.58/MWh, according to data from LSEG.
Storage Levels and Supply Challenges
The EU’s gas storage facilities are 85% full, 10 percentage points lower than at this time last year, according to Gas Infrastructure Europe. Analysts warn that this reduced capacity, coupled with potentially colder weather, could lead to more rapid depletion of reserves compared to the previous two relatively mild winters.
Barbara Lambrecht, an analyst at Commerzbank, commented:
“Colder periods this winter are likely to erode reserves faster, creating more challenges than we have seen in recent years.”
Global Competition for LNG
Europe’s reliance on LNG imports has grown since the dramatic reduction of Russian pipeline supplies following the invasion of Ukraine. However, Asia’s increasing demand for LNG is intensifying competition. The region’s economic recovery and rising energy needs could limit Europe’s ability to secure sufficient supplies, potentially driving prices higher.
Implications for European Industry
High energy costs continue to undermine European businesses, particularly in energy-intensive sectors like manufacturing and chemicals. Companies face tough decisions, including curbing production or passing higher costs onto consumers, which could stoke inflationary pressures.
The European Union has taken steps to mitigate the crisis, such as implementing energy price caps and diversifying supply sources. However, these measures offer limited relief in the face of global market dynamics and geopolitical risks.
