European natural gas prices have fallen to their lowest levels since Russia’s full-scale invasion of Ukraine, boosting the economies of the European Union and Britain and dealing a blow to President Vladimir Putin’s war effort.
Benchmark gas prices on Friday fell below €50 per megawatt hour for the first time in almost 18 months, down to €48.90/MWh, as traders report increasing confidence that European countries will avoid shortages this season and next. The peak gas benchmark is over €300/MWh in August 2022.
Helped by mild weather, plenty of storage and efforts to find alternative sources of supply, European gas prices have fallen by as much as 85 percent since August 2022, while a major cut in Russian supplies sparked alarm over a possible shutdown.
“Europe looks like it has succeeded in cutting off Russian gas,” said Henning Gloystein, at consultancy Eurasia Group. He added that gas “is still expensive, but it does not need to be priced at the risk of immediate shortages”.
Restoring prices to 2021 levels marks a setback for Putin ahead of the first anniversary of the Ukraine war on February 24.
Moscow’s energy revenues, which initially rose after the invasion and helped finance the Kremlin’s military offensive, have now fallen. Russian oil is currently selling at a discount and gas prices are not high enough to offset the decline in the country’s export volumes.
Falling gas prices have also fueled expectations that EU countries and the UK may experience only a mild recession this year, or may avoid economic contraction. The European Commission said that falling prices, combined with government and household spending, had improved the EU’s short-term outlook.
Household bills will not fall as quickly, as suppliers will secure gas and electricity for consumers when prices are at a higher level. But the drop in wholesale prices should eventually reduce the bill.
Rising gas prices have fueled a cost-of-living crisis and fueled high inflation as Russia initially cut supplies by 2021. Moscow later cut exports in retaliation for western support for Ukraine after the invasion.
Prices remain elevated compared to historical levels of around €10 to €30 per megawatt hour but analysts say they do not threaten to trigger a deep recession across Europe.
The price of gas, which last summer was so expensive that it was almost equal to $ 500 per barrel, has now dropped to $ 85 per barrel.
With just six weeks left in the winter, gas storage levels in Europe, one of the key metrics to avoid shortages, were around 65 percent as of Wednesday, according to the European Gas Infrastructure trade group. That’s higher than normal levels for the time of year.
Gloystein said that industrial gas demand in Europe has fallen by about 20 percent in the past year without any decline in production due to efficiency and fuel switching.
Long-term weather forecasts now predict a mild March which should reduce demand for heating. Analysts say it should make filling storage before next winter easy even though Russian supplies are lower than at the start of 2022.
He also pointed to the return to the Freeport liquefied natural gas export terminal on the US Gulf Coast, which provided about a fifth of all US export capacity before it shut down last summer, as a source of new supply to the market.
Tom Marzec-Manser, at the ICIS consultancy, warned that the drop in prices is likely to hit demand for gas in Asia, especially as China’s economy reopens.
“While the high level of storage in Europe and Asia does not show direct signs of trying to outcompete the Atlantic for cargo, the falling price will undoubtedly reignite some demand for gas, both in the industrial and power sectors,” he said.
“This means, when TTF [benchmark price] going down, pre-Covid wholesale gas prices are unlikely to happen.