European natural gas futures settled below €50 per megawatt-hour for the first time in more than 17 months as the region’s worst energy crisis in decades recedes, although there are signs that little further price drops are likely.
Futures have plunged more than 80% since their peak in August when Russia’s gas cuts hit Europe with about $1 trillion in energy costs, hitting the region’s economy and driving inflation at most in decades. Now, the continent is undergoing a sharp turnaround as relatively mild weather, efforts to reduce fuel consumption and strong inflows of US liquefied natural gas into Qatar take advantage.
For now, high seasonal storage levels are a sign of optimism that the region can get through this winter and next. With most of Russia’s usual gas volumes now absent, European nations appear to have settled on ample replacement options.
However, some analysts question whether the drop in prices will persist. With the end of winter approaching and heating demand falling, lower prices could make gas cheaper for power generation in Europe than alternatives such as coal.
“Gas prices have fallen within the fuel switching range, suggesting that it is now more profitable to operate more efficient gas plants compared to less efficient coal plants,” said Stefan Ulrich, an analyst at BloombergNEF.
Demand is also increasing from India to China. Prices could increase if there is prolonged cold weather before the end of winter or if there are supply disruptions. Carbon prices have also risen, while falling gas prices have brought the fuel within striking distance of oil prices.
“We’re getting to a point where the downside is probably more limited, while there’s still clearly upside, especially if you get the strong economic growth in China,” said Steve Hill, executive vice president of energy marketing at Shell Plc, in a presentation Thursday. “We are clearly getting closer to that
First-month Dutch futures, the European benchmark, closed 5.7% lower on Friday at 49.05 euros per megawatt-hour, the lowest settlement price since late August 2021. The contract has lost more than 35% so far this year, but still higher than historical averages.
new normal
The “new normal” for gas prices in Europe beyond this year could be between 30 and 60 euros, depending on global economic activity and supplies, economists at Deutsche Bank AG said in a note. Marion Muehlberger and Eric Heymann. They see that “there are no more worries about the supply crisis, even for the winter of 23-24” for Europe’s biggest consumer, Germany.
German utility Uniper SE, which was bailed out by the government last year after the energy crisis brought it to the brink of collapse, said on Friday it will overcome problems caused by gas cuts in Russia by the latest in 2024, with high costs to replace the lost volumes remain a problem.
Recent price falls have helped the company cut its losses significantly, although it still posted negative adjusted earnings before interest and tax of €10.9 billion for 2022.
