(Bloomberg) – Gas prices in Europe have plunged to their lowest since mid-2021, when Russia was just beginning to cut supplies ahead of its invasion of Ukraine, helping to reverse a spike in inflation and relieve consumers.
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The crisis – gas futures have already fallen by two-thirds this year – has not only eased the pressure on household budgets. It also undermines one of the biggest bargaining chips held by President Vladimir Putin – the ability to cut gas supplies to the region.
With some traders predicting that short-term prices might even turn negative at times this summer, the situation couldn’t be more different than in May of last year. Back then, futures were four times higher than today and countries were forced to restart coal production to keep the lights on after Russia cut gas supplies.
There were also concerns about shortages and Europe’s ability to build up gas storage levels ahead of winter. Now, stocks are above average and could even be replenished during the summer, and sooner than expected.
Benchmark Dutch futures have fallen for eight consecutive weeks and are below €25 per megawatt hour, the lowest since May 2021.
Increased imports of liquefied natural gas to replace Russian supplies helped, as did a relatively mild winter, which meant the region did not need to draw too heavily on storage sites. Reserves are almost 67% full for Europe, compared to a five-year average of around 50%. German stocks are at 73%, according to data from Gas Infrastructure Europe.
Economic weakness also plays a role in reducing energy consumption. The recovery in China has lost momentum, European manufacturing is in a deep recession and Germany unexpectedly contracted in the first quarter, tipping it into a recession.
Additionally, Europe has been pushing to build more renewables. New solar and wind farms and good weather conditions have helped reduce gas requirements for power generation this year, further dampening demand.
The drop in prices “is great news for Europe and shows that the increase in LNG imports together with the reduction in demand succeeded in quickly rebalancing the European market after Russia closed the taps”, said Georg Zachmann, senior researcher at the Brussels think tank Bruegel.
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For households, the price advantages are obvious. Eurozone inflation likely slowed to 6.3% in May, the lowest since just before Russia invaded Ukraine. In the report, due Tuesday, economists at Nomura say they expect to see “lower wholesale energy prices reaching consumers across the eurozone.”
But even after central banks raise interest rates, the underlying measures of inflation turn out to be more rigid. This is partly because energy costs have passed through to the price of goods and services throughout the economy. As headline inflation recedes, wage pressure will ease, but this process will take time.
Read more: Eurozone advance to 2% inflation keeps ECB in rate hike mode
For most sectors, the crisis began when Russia invaded Ukraine in February 2022. For energy, it began two years ago when Moscow began to cut supplies by refusing to increase deliveries to Europe via Ukraine. Today, Ukraine is the last remaining route for gas piped from Russia to Western Europe after the closed Nord Stream link to Germany was damaged in September.
The market is watching China’s gas demand closely. According to Energy Aspects analysts, gas prices in Europe could fall further, below €20 per megawatt hour, if Chinese LNG imports turn out to be very weak.
In Europe itself, current low prices are not triggering an increase in industrial demand, which was reduced last year when energy costs soared. If and when it will come back is one of the biggest questions for gas traders trying to judge where the bottom of the market might be. Some say some of this loss will be permanent.
“Demand destruction is a nice phrase for industry collapse,” said Brenda Shaffer, senior fellow at the Atlantic Council’s Global Energy Center in Washington. “Due to high energy prices in Europe, many industries, especially gas-intensive ones, have collapsed or moved outside of Europe.”
“These industries will not come back, even if energy prices go down,” she added.
–With help from Stephen Stapczynski and Anna Shiryaevskaya.
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