by Carl Tannenbaum, Vaibhav Tandon, and Ryan Boyle, Northern Trust
In Game of Thrones, the phrase “winter is coming” signaled a looming threat that required preparation long before it arrived. Europe's gas market faces a similar challenge today.
The continent is not facing a repeat of the 2022 energy crisis. European policymakers’ push to diversify supply sources and expand import capacity have added to resilience amid the current disruption of energy supply chains.
Yet Europe's safety cushion is thinner than normal at this time of the year. Gas storage facilities are only around 68% full, well below the seasonal norm, with key countries like Germany and the Netherlands lagging. Germany's inventories are sitting at their lowest level at this point in the year since record-keeping began in 2011.
The result is a market that is adequately supplied, but far from comfortable. European benchmark gas prices have already surged this year and are trading above levels envisioned in the European Central Bank's adverse scenario. A cold winter, disruptions to Middle Eastern supplies, or stronger gas demand from Asia could ignite bidding wars for cargoes and push prices higher. nor
Thin gas inventories and tight markets raise the risk of price shocks.
The outlook is further complicated by Europe's unfinished break from Russian supplies. While the bloc is preparing to phase out remaining Russian energy imports in 2027, some dependencies persist. Belgium, for example, relied entirely on Moscow for liquified natural gas in July. Replacing those remaining flows will require securing alternative sources in an already tight market.
Higher gas prices matter far beyond household heating bills. Gas is deeply embedded throughout the European economy through the generation of electricity. Research suggests gas shocks have a greater tendency than oil shocks to feed into underlying inflation and keep price pressures elevated for longer. That presents another challenge for policymakers already grappling with weak growth, strained public finances and rising political discontent.
Winter is coming. If Europe doesn’t prepare adequately, it will take more than dragons to keep the continent warm.
Copyright © Northern Trust
