Traders expect European gas prices to remain high for years to come

Traders expect European gas prices to remain high for years to come, driven by supply pressures, even after Russian President Vladimir Putin allowed flows to resume last week via an important pipeline.

The price of gas due to be delivered to Europe at this time of year in 2023 and 2024 is close to its all-time highs of €134 and €82 per megawatt-hour, respectively, according to trading in annual futures contracts used by fuel consumers. To secure long-term prices. Prior to last summer, European gas prices had consistently traded at less than €40 per megawatt-hour for more than a decade.

Gas prices doubled in June when Moscow cut flows ahead of scheduled maintenance work for the Nord Stream 1 pipeline to Germany. But despite Russia turning the taps back this month, fears of possible further turmoil have kept futures near record levels.

Markets are looking at concerns that Putin will continue to raise the risk of turning off the taps as long as his invasion of Ukraine continues. The Russian leader has warned of possible problems with turbines next week, which could lead to reduced gas flows through Nord Stream 1.

Helima Croft, an analyst at RBC, said US government officials increasingly believe that over the summer “Putin is likely to seek to keep Europe in a constant state of panic by deploying a rolling halt strategy to prevent adequate storage space being built.”

Pessimism about Europe’s energy outlook has been growing since last fall when the Russian president refused to increase gas flows, and now higher energy prices have raised expectations of a recession on the continent.

Vincent Demore, Secretary General of the International Group of LNG Importers, has warned that Europe’s energy crisis will drag on for years and that its luck will eventually run out unless it can sign long-term deals for LNG supplies from exporters such as the United States or Qatar and reduce its dependence on the spot market. Expensive as dealers can get gas for imminent delivery.

“We may be able to get through the winter of 2022 or 2023 without major damage – if we’re lucky – but next winter will probably be more difficult and the next winter even more difficult,” he told reporters earlier this month.

A complete shutdown of supply through the Nord Stream 1 pipeline will lead to wider rationing this winter and further inflationary pressure.

Such a scenario would deepen the blow to eurozone economies this winter, according to consultancy Oxford Economics. Deutsche Bank analysts estimate that Germany, which got more than half of its gas imports from Russia in 2021, will be on track to decline GDP by 5-6 percent next year.

The European Union put forward plans last week to cut gas consumption by 15 per cent over the winter, but it has already faced a backlash from member states.

Karolina Semenyuk, an analyst at consultancy Rystad, said Europe needs to move quickly to cut consumption to survive this relatively unscathed winter. Even if he succeeds, she said, “the specter of next winter in 2023-24 is likely to keep prices high for months on end.”

But some see a path toward lower prices, despite limited new sources of LNG supply before 2026. “We should not underestimate the effects of the recession” on gas demand, Jonathan Stern, a distinguished research fellow at the Oxford Institute for Energy Studies, said, citing a “dramatic” decline during the 2008 financial crisis.