When the European energy crisis started in mid-2021, Brussels bet the upheaval would be largely gone by spring. As it became obvious that wasn’t going to happen, it speculated the problems wouldn’t last beyond 2022. That wager looks to be off, too. Away from the daily gyrations of European spot natural gas prices — swinging between worries about a potential Russian invasion Ukraine and the effects of mild winter — the forward market has begun to price trouble in 2023, 2024 and beyond.
Europe imports approximately 40% of it gas from Russia, and if a war — one that Moscow says it does not intend to launch — led to the loss of all those supplies, the region would be forced to take draconian measures, including shutting large swatches of its energy-intensive industry. European gas prices would spike multiple times higher than the record high set in December.
The gas crisis, however, goes deeper and remain beyond the spat with Moscow and the lingering impact of the cold winter of 2020-21. Domestic gas production is falling, notably in the Netherlands and the U.K., and that means a growing share of the gas Europe consumes must come from abroad. With Asian demand for liquefied natural gas (LNG) rising fast, Europe will have to compete for supplies — at a price. Russia, via its state-owned giant Gazprom, is unlikely to refill the depleted European gas inventories as it once did every summer, ahead of the high-demand winter season. Europe will have to go it alone.
The forward contracts are signaling that European gas prices may remain higher than during the 2010-to-2020 period, when it averaged about 20 euros ($22.54) per megawatt-hour. Take the seasonal contract for summer 2023: It is has surged above 40 euros per MWh. Or the one for winter 2024: nearly a record high for the contract of more than 30 euros per MWh.
Granted that the prices for 2023 and 2024, let alone 2025, are significantly lower than today’s spot costs of nearly 100 euros, but they represent hikes of between 100% and 50% from the past decade’s average.
The market, of course, may change tack. The forward prices do not represent forecasts but rather the range of prices the market participants, which include utilities, gas producers and speculators, are prepared to trade today for future delivery.
Perhaps the most important signal from the forward prices is that the continent shouldn’t relax. In Brussels, and other European capitals, there’s a sense of relief that the feared worst-case scenario of 2022 – electricity blackouts due to gas shortages – has been adverted. Yes, prices have risen to eye-watering levels, the official narrative goes, but it hasn’t been as bad as the naysayers warned.
The problem is that Europe has this respite in part thanks to something that no one can control: the weather. The U.K. and the continent have been able to draw huge amounts of LNG cargos otherwise heading into China, Japan and elsewhere in East Asia because the region has enjoyed a milder-than-expected winter. It’s also because China has increased coal production, which has reduced the country’s gas demand. Or, as Samantha Dart of Goldman Sachs Group Inc. put it succinctly: “High European LNG imports now do not imply high LNG imports later.”
Europe must assume that the high gas prices of the last few months aren’t a one-off, but perhaps the start of a new trend. The response, including how to protect the most vulnerable consumers, must take that into account. The subsidies that some governments are deploying today — envisioned as temporary — may have to settle into long-term commitments.
