European gas prices have fallen to the lowest level since the start of the energy crisis, boosting hopes of a stronger economic recovery as energy pressures ease.
The European TTF benchmark hit a low of €35.20 a megawatt hour on Friday, a level last seen in July 2021 when Russia was first starting to squeeze Europe’s energy supplies ahead of its invasion of Ukraine. It later rose slightly to end the week at €35.95. The TTF benchmark peaked at more than €340/mwh hour last summer after Russian slashed gas exports to Europe, stoking inflation and sending energy bills soaring.
The drop towards €35/mwh has bolstered the view that energy prices are returning to normal after Europe successfully tapped alternative gas sources, accelerated the roll out of renewable energy and benefited from a mild winter that has left gas storage sites brimming for the time of year.
Oil prices have also fallen, with Brent crude down to near $75 a barrel having traded above $100 a barrel for much of last year, dropping back to roughly the level it traded at before the invasion of Ukraine.
Morgan Stanley analyst Martijn Rats said Europe was now in a position to refill its gas storage sites — crucial for meeting winter demand — to 100 per cent of capacity even if Russian supplies were to drop to zero.
He said prices were now dropping to slow down the arrival of seaborne cargoes of liquefied natural gas that Europe had scrambled to secure last year to replace Russian flows.
“There is not enough room in Europe’s storage capacity,” Rats said, pointing out that storage was already at 60 per cent of capacity. That compares with about 35 per cent at the end of winter last year.
“At some point, the inflow of LNG will need to slow to prevent inventories from overfilling.”
The drop in energy costs has helped temper the outlook for inflation, allowing central banks to slow the rate of interest rate increases. The European Central Bank raised interest rates by a quarter of a percentage point this week, a switch after a series of larger raises.
Gas prices still remain elevated compared to historical levels, however. In 2019 TTF averaged less than €15 and the pre-crisis peak for prices was €29.17 in 2018, which even adjusted for inflation is still slightly below where prices are trading today.
Gas traders and analysts who gathered at the annual Flame conference in Amsterdam this week cautioned against complacency, warning Europe could still face challenges in the coming winter.
“We got through this because we got a mild winter and Chinese demand [for LNG cargoes] was down . . . it’s luck,” said James Watson, secretary-general at Eurogas, an association representing the wholesale, retail and distribution sectors.
“Is that the strategy that we will have now? We will have to get lucky three, four years in a row for supply and demand to balance. That’s not the right way to go about it.”
The International Energy Agency, in its recent quarterly gas market report, said the demand and supply balance for global gas “is subject to an unusually wide range of uncertainties” this year, ranging from weather, availability of LNG and the possibility of further declines in Russian pipeline gas to Europe.
The remaining Russian pipeline flows through Ukraine and Turkey now make up less than 10 per cent of Europe’s gas imports compared to about 40 per cent before the invasion, but traders believe their loss could still trigger another spike in prices.
Gas markets are reflecting some of these risks; TTF contracts for delivery in the winter season are still trading above €50/mwh and could rise further if the weather is less mild than the winter just passed or if Asia competes harder to bring in LNG.
“There are a lot of other things that could happen,” said one senior trader on the sidelines of the conference, warning that while they were unlikely to scale the heights of last summer they “could definitely go back” to €150/mwh.