Quick Hit: On the Recent Spike in European Gas Prices

Is a new European energy crisis brewing? Some worry recent natural gas spikes point to higher energy bills (or worse) for the Continent this winter. But in our view, short-term volatility notwithstanding, natural gas prices don’t seem set to soar from here, which should render this another brick in the young bull market’s wall of worry.

European natural gas prices have risen since early August, including some big daily jumps like the 28% spike from €28.38 per megawatt hour (Mwh) to €36.26 Mwh from August 8 – 9.^[i] Many blamed rising prices on potential strikes at a couple of Australia’s liquefied natural gas (LNG) facilities, worrying this could take some Aussie LNG production offline (about 10% of global supply).^[ii] The Land Down Under is one of the world’s biggest LNG exporters, accounting for about 20% of the global market—with most of its shipments going to Asia.^[iii] That could send Asian buyers elsewhere, increasing competition for limited global supply, allegedly pushing energy prices up for the foreseeable future—and potentially keeping European energy bills high this winter.      

Strike chatter perhaps did ding sentiment, contributing to European natural gas prices’ recent rise. But commodity markets—like the stock market—can be volatile in the short term. On a daily basis, prices may rise or fall for any (or no) reason. Also, strikes aren’t a given: Negotiations remain ongoing, so this could end up being a nothingburger.

To us, this seems like a rehash of 2022’s giant European energy freakout. After Russia’s invasion of Ukraine last year, the consensus presumed retaliatory Western sanctions would lead to severe energy shortages on the Continent. But that didn’t happen. The EU found alternative LNG supply sources, particularly from the US and Qatar.^[iv] Prices fell below pre-invasion levels, rationing never happened and European economies by and large got on with life.

But recycling fears is a bull market hallmark, so it doesn’t surprise us that many now say 2023 will be the real test for Europe despite all of its progress. The EU just hit its target of filling gas storage facilities to 90%, almost three months ahead of its November 1 deadline.^[v] However, storage facilities at capacity would cover only 25% - 30% of projected wintertime EU gas consumption, so some worry wobbling LNG supply abroad leaves Europe’s energy situation fragile and uncertain. We don’t dismiss the possibility production disruptions or severely cold weather leads to much-higher gas prices. But we think it is equally possible prices don’t soar thanks to another mild winter, better conservation than expected and/or higher production. Some small-scale floating LNG projects in the US and Africa could boost gas supply this year, helping offset potential headwinds elsewhere.^[vi]

Note, too, today’s prices are a far cry from last year’s all-time high levels even with the recent rise. (Exhibit 1) If gas prices nearly 10 times today’s didn’t drive the eurozone’s economy into a deep ditch, we doubt recent wiggles will do much. Europe got through that tough period without resorting to rationing or blackouts. History won’t necessarily repeat, but don’t underestimate Europe’s ability to adapt again if necessary.

Exhibit 1: European Natural Gas Prices

Source: FactSet, as of 8/18/2023. Dutch TTF natural gas price in euros, 12/31/2020 – 8/17/2023.