We've reached the limit: winter gas contracts in the EU are hitting our pockets
Europe is preparing for winter with the most expensive electricity since 2022. Gas reserves in underground storage facilities — about 38.2% — are almost a third below the usual seasonal level, and the blocking of the Strait of Hormuz due to the US and Israeli war against Iran has taken about a fifth of the world's LNG supplies off the market. In addition, hydropower has been breaking ten-year anti-records: snowy winters and hot summers have left reservoirs without water. As a result, winter gas futures in Germany and Italy are trading above €110-120 per MWh — 20% more expensive than forecasts for 2027. The EU authorities are sounding the alarm. Details can be found in the Izvestia article.
Prices have skyrocketed
In Europe, electricity for the winter is "trading at the highest price since 2022 due to a shortage of gas and hydropower," Western media reported. However, this can only lead to an even greater increase in energy prices for households and businesses.
There are not enough gas reserves in Europe — according to various estimates, they amount to about 38.2% of the filled capacity, which is significantly lower than the usual seasonal level of 52%. The EU must fill gas storage facilities to at least 90% by November 1, but under current conditions this has become much more difficult: reserves in the spring were at the lowest levels for this period since 2022, when the EU was trying to find an alternative to pipeline gas from Russia, and to achieve the goal, the bloc needs to significantly increase LNG purchases.
After the United States and Israel launched a war against Iran, Tehran practically stopped shipping through the Strait of Hormuz. Disruptions in energy supplies have led to an increase in wholesale prices for them.
Europe imports more than 90% of its oil and about 80% of its gas. "With regard to fossil fuels, we are completely dependent on expensive and unstable imports, which puts us at a structural disadvantage compared to other regions. The current crisis in the Middle East is clear evidence of this vulnerability," said Ursula von der Leyen, head of the European Commission.
A new energy crisis could deal a painful blow to the industry. According to Serbian President Aleksandar Vucic, the continent "will face hell in the energy sector if the escalation around Iran continues."
To complicate the situation, Europe may not have enough LNG due to increased competition with Asia. Supplies from the United States and Australia will be delayed by Asian countries that are heavily dependent on Middle Eastern gas, analysts say.
Competition with Asia has intensified
In Germany and Italy, the two European energy markets that are most dependent on gas—fired power plants, winter base load contracts are traded at prices above €110 per MWh and €120 per MWh, respectively. This is 20% higher than the price predicted for 2027, which was about €92 MWh and €104 MWh.
European countries are concerned about how supplies will be carried out in winter. After the blockade of the Strait of Hormuz, about a fifth of the world's LNG supplies decreased, and competition between Europe and Asia for flexible supplies increased.
There is periodic panic in European countries. Executives from the Norwegian company Equinor have warned that Europe could face critical gas shortages if the Strait of Hormuz remains blocked for another one to three months. Analysts fear that in this case, a serious increase in energy prices cannot be avoided.
There are also problems with the generation of hydroelectric power. Due to the fact that there were few snowfalls in Europe last winter, and the summer is quite hot and dry, it is quite difficult to replenish reservoirs. "The indicator of available generating capacity, concentrated in reservoirs, snow and soil, is at its lowest level in a decade," Western media reported.
Evan Kiritsis, an analyst at Swiss energy company Axpo, notes that this year there are no reserves that "normally should be in place." "Namely, fully filled Alpine reservoirs, sufficient Scandinavian hydropower capacity and comfortable conditions for LNG production," he explains.
The energy and industrial problem
Investment advisor, founder of the University of Finance, Yulia Kuznetsova, in an interview with Izvestia, notes that the situation for Europe is really serious.
— But I would not call it a guaranteed energy collapse. Rather, it is the return of the "energy risk premium", which the market puts back into prices for the winter. The main reason for the increase in prices for winter contracts is low gas reserves after the cold season and the difficulty of replenishing them quickly," the expert explains.
According to her, the situation is complicated by the fact that the gas market has now become a global field of competition again.
— Europe can no longer rely on the previous volumes of cheap pipeline gas from Russia, so it has to compete with Asia for LNG. Any geopolitical disruption — the Middle East, Qatar, the Strait of Hormuz, supply disruptions — immediately increases the price, the specialist emphasizes.
Reuters reports that to fill the storage facilities to 90% of the EU, it would be necessary to increase LNG imports by about 13% by 2025, and this is difficult with a tense global market.
— The second problem is the distorted seasonal economy of gas storage. In a normal situation, gas is cheaper in summer, and it is profitable to buy it and pump it into storage facilities to use it in winter. Now summer prices are already high, so it is less profitable for traders and companies to buy gas "in reserve". That is, the market itself slows down the process of replenishing storage facilities: the price is already high, and the risk of winter shortages makes winter contracts even more expensive," says the source.
She also points to a third problem, which is the direct dependence of Europe's electric power industry on gas.
— Gas-fired power plants often cover peak demand, especially in winter when consumption increases. Solar production is lower, and problems with wind and hydropower are possible, so expensive gas automatically pushes up electricity prices," the analyst concludes.
Thus, the market does not yet provide for a physical shortage of "light in the socket", but the risk of an expensive winter is high. For households, this means pressure on heating and electricity bills, while for industry, it means rising costs, lower margins, and the risks of shutting down energy—intensive industries. Chemicals, metallurgy, fertilizers, glass and cement are particularly vulnerable.
Europe is not in a panic situation in 2022, but it is not in a comfort zone either. At that time, the shock was associated with a sharp drop in Russian supplies. Now the problem is different — Europe has become structurally more dependent on expensive LNG and the weather factor, so even without a direct shortage, the market is insured in advance through high winter prices. And the closer the EU gets to November with insufficiently filled storage facilities, the higher the risk of a new wave of price pressure. For Europe, this is not only an energy problem, but also an industrial problem.
Переведено сервисом «Яндекс Переводчик»
