IS THE EUROPEAN GAS CRISIS OVER?

12.10.2022 Over the summer the price of European gas shot up as pipeline supplies from Russia dwindled. Below we look at how the crisis is evolving and the implications for markets.

As the summer progressed the flow of gas though the Nord Stream pipeline, that supplies gas from Russia to Europe, dwindled. At the end of August gas supplies came to a complete halt. In response gas prices in the UK and Europe roughly trebled. This was because, prior to the invasion of Ukraine, Russian gas accounted for around forty percent of European consumption.

At the time there were concerns that there would not be enough gas to get through the winter unless rationing was introduced. However, the Europeans have been surprisingly successful at securing alternative supplies. Norway and Algeria have pumped extra gas through their pipelines. Meanwhile European imports of seaborne Liquified Natural Gas (LNG) have surged. This has been aided by a 20 percent increase in global LNG supply this year. As a result, European gas storage facilities are now over ninety percent full ahead of the winter.

The success of this strategy is reflected in natural gas prices. European and UK prices have fallen around fifty percent from their late August peak. Whilst they remain approximately twice the price they were prior to the invasion, prices can be expected to continue to fall as more LNG supply is rolled out globally.

So, whilst the price of gas is still problematic for European politicians it has not turned out to be the economic catastrophe that some feared. As a result, it has significantly reduced the influence of the progress of the war in Ukraine on European economies. It also suggests that the costs to governments of the energy price cap may be a lot less initially predicted. For example, at current prices the UK scheme might only cost half the original estimate of around GBP 90 bn. This would mean that the government would need to borrow significantly less money in the next year or two which would be positive for UK government bonds (Gilts).

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin