As winter approaches, Europe’s industries are bracing for a significant gas price shock, driven by depleting stocks, intensified competition for liquefied natural gas (LNG) from Asia, and the looming threat of reduced Russian gas supplies.
Key Highlights:
Historical Context:
Following the energy crisis of 2022, when gas prices soared to nearly 350 euros per megawatt hour (MWh), many European firms have closed factories, reduced operations, and cut jobs due to unsustainable energy costs.
Current Demand and Prices:
EU gas demand is currently 17% below the five-year average observed before the pandemic. However, gas prices are at their highest in over a year, with predictions of further increases. Svein Tore Holsether, CEO of Yara, cautioned against complacency, noting that current prices remain significantly higher than those in the U.S. and other regions.
Supply Concerns:
The impending expiration of a Russian transit deal for gas supplies via Ukraine at the end of the year has heightened anxieties, leading to increased purchasing activity. Francisco Blanch from Bank of America predicts EU gas prices could rise to 70 euros/MWh next year, compared to nearly 50 euros/MWh now.
Storage and Inventory Issues:
Current EU gas inventories stand at 85% capacity, which is about 10 percentage points lower than last year. Analysts warn that colder weather could deplete these reserves more rapidly than in previous winters.
Impact on Industries:
Over the past four years, Europe has seen numerous factory closures and nearly one million manufacturing jobs lost. High energy prices have led to reduced production capacity, particularly in France, where industries expect to operate at only 70-80% this winter.
Competitiveness Challenges:
A report by former ECB chief Mario Draghi highlighted the significant economic costs of losing relatively cheap Russian gas, noting that energy prices in the EU remain 2-3 times higher than in the U.S. and 4-5 times higher for natural gas. This disparity threatens the competitiveness of European industries.
Relocation Concerns:
A survey by Germany’s chambers of commerce indicated that high energy prices are prompting some firms to consider relocating abroad. The German industry lobby group BDI warned of increasing risks of de-industrialization due to the silent migration of small and medium-sized enterprises.
Future Outlook:
With EU storage levels lower than last year and competition for LNG intensifying, Europe is likely to face ongoing challenges in securing energy supplies. The European Parliament has taken steps to restrict Russian LNG imports, potentially increasing competition for U.S. and Middle Eastern supplies.