The increase in wholesale natural gas prices is already showing up in electricity prices across the continent. Wholesale power prices in Germany have risen more than 60% in 2021, while hardest-hit Spain has seen electricity prices rise above € 100/MWh, a record high and more than double the rate in summer 2019.

Natural gas prices in Europe recently jumped to multi-year highs. The UK NBP natural gas spot price climbed to 119 pence per therm on August 16, the highest since 2005. Dutch TTF gas futures, a key European benchmark, increased to € 48/MWh—a record high.

A confluence of supply and demand factors are behind the surge. Gazprom’s failure to book natural gas capacity through the Ukraine pipeline dovetails with a recent decline in natural gas output in Europe and the US . Last year’s cold winter drove down gas inventories, leaving the entire continent vulnerable to a severe energy crunch later this year.

Our View

Record-low natural gas inventories and rising prices are a global phenomenon, but Europe is bearing the brunt of the shortage. Because so many factors are contributing to the price surge, pressures are likely to remain high at least until Q2 2022. Europe’s hopes of avoiding a winter energy crisis increasingly rest on two potential reprieves: a mild winter, or an increase in supply from Russia. The former is unknowable, while the latter will depend on developments in relations with Russia. Assuming the Nord Stream 2 pipeline comes online later this year, as planned, Europe may benefit from increased flows through the pipeline itself and from an ease in “manufactured” shortages by Gazprom.

Business Implications

A variety of firms operating in Europe can expect to be negatively impacted by the natural gas shortage. B2B firms in the industrial space are likely already experiencing a margin squeeze through rising energy input costs. B2C firms and B2B firms serving the SME sector could experience a decline in demand for their products and services beginning in Q4, as business and household utility fixed costs rise.

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