European gas prices hit four-year high

The exchange price of gas in Europe has risen to highs since December 21, 2022 amid the continuation of the conflict in the Middle East and low reserves in underground storage in the EU before the heating season. On Monday, October 26, the value of November futures at the TTF hub in the Netherlands at its peak rose by 2.3%, to $1,133 per 1,000 cubic meters, according to trading data ICE Futures.

Exchange gas prices in Europe were consistently high in 2021-2022. In early spring 2022, when the EU sharply reduced imports of pipeline gas from Russia, quotations reached a historic record of $ 3892 per 1,000 cubic meters. Then prices went down markedly.

In 2026, the gas crisis in Europe escalated due to the reduction of available volumes of liquefied natural gas (LNG) from Middle Eastern countries, primarily from Qatar and the UAE. This happened after the closure of the Strait of Hormuz, through which about a fifth of the world's LNG trade normally passes, and damage to Qatar's liquefaction facilities.

According to Pavel Petrov, senior consultant of S+Consulting, two liquefaction lines with a total capacity of 12.8 million tons of LNG per year, or about 17% of Qatar’s previous export capacity, were put out of action. Their recovery can take at least three years, so the market does not expect an immediate return of these volumes even after normalization of shipping.

However, the second wave of rising gas prices in Europe was triggered by a seasonal increase in demand. Experts interviewed by RBC note that insufficient reserves in underground gas storage facilities (UGS) before the winter increase the vulnerability of Europe, which has to compete for spot volumes with Asian consumers and offer a higher price. At the same time, while Asia has the opportunity to temporarily switch to coal during gas price jumps, in Europe the transition to coal generation is limited, including the cost of carbon emissions, adds Igor Yushkov, an expert at the National Energy Security Fund.

UGS overcrowding in the European Union remains at its lowest levels for this period in 15 years, raising concerns about the heating season. At the end of the gas day on October 25, UGS facilities were filled by 74.92%, they accumulated about 80.5 billion cubic meters of gas. In other years, UGS reserves by the end of September exceeded 80%, including in 2022.

Underground storage supplies approximately 20-30% of the EU’s winter gas consumption, smoothing peak demand and supply disruptions. After the reduction of Russian pipeline imports in 2022, the European Commission set a target of 90% storage occupancy by November 1 for the countries of the association. Later, the deadline for achieving the goal was extended: now it can be completed in the period from October 1 to December 1, and under difficult conditions, a decrease in the target by 10 or even 15 percentage points is permissible.

The current occupancy of European storage facilities is atypical for Europe. On average, for five years by this date, the level of gas in storage was 89%, says Ada Bukharova, a consultant at ATK Consulting. According to her calculations, the gap between the current level of reserves and the five-year average is about 14 billion cubic meters of gas. The authorities of some countries are forced to buy gas on the market, which further raises prices. For example, Germany has signed additional gas contracts worth almost €245 million to prepare for winter.

In the stress scenarios of European regulators, the deficit may reach 22-40 billion cubic meters, adds Kept partner, head of the practice of providing services to oil and gas companies Maxim Malkov.

European consumers have not yet felt a physical shortage of gas, Bukharova said. However, the situation will depend on the weather and the ability to attract additional LNG shipments. According to her, if supplies from the Persian Gulf do not recover and Europe is waiting for a cold winter, then prices above $ 1,100 per 1,000 cubic meters can last until spring.

The Center for Price Indices (CCI) believes that in a warm winter, the current reserves may be enough to pass the heating season. If the temperature drops significantly in the coming weeks, quotes may continue to rise. A similar opinion is shared by Petrov: with a cold winter and the persistence of supply interruptions, the price of gas can short-term exceed €120 per 1 MWh (about $ 1,400 per 1 thousand cubic meters).

Which industries will suffer from expensive gas

Prolonged retention of quotations above $1,100 per 1,000 cubic meters can increase pressure on European industry. Nitrogen fertilizer producers remain the most vulnerable: natural gas is used both as an ammonia feedstock and as an energy source, Bukharova says. According to the European Commission, gas accounts for 70-80% of the cost of such products. The analyst notes that a new wave of transferring some of the capacity outside Europe is already underway. “For example, Norwegian producer Yara in the third quarter reduced ammonia production and announced the purchase of an ammonia plant in Texas to be less dependent on European gas,” says Bukharova.

The business of European producers of nitrogen fertilizers suffered greatly due to the high cost of gas in 2022. Then in the summer, not only Yara, but also other companies, such as Polish Grupa Azoty and British CF Industries Inc, were reduced or stopped production.

In other energy-intensive industries, including the chemical industry, glass, ceramics and steel, risks also remain high. However, there is no data on mass shutdowns of enterprises. Capacity utilization in the EU chemical industry increased to 75% in the third quarter.