The recent uptick in gas prices highlights FrontierView’s expectations that multinationals will continue to experience structurally high production costs, and that inflationary pressures throughout the eurozone are likely to continue. On a more positive note, recent disruptions to supply do not represent a substantial risk to the outlook in light of lower demand and healthy inventory levels. However, risks to the outlook persist, and a suspension of Russian LNG deliveries could push prices to EUR 60.0–70.0 MWh, which would further complicate demand planning and ensure that production costs remain stickier than expected. The ongoing energy market reform should increase predictability in eurozone markets but is unlikely to provide substantial alleviation of existing pressures for multinationals.
Overview
- Dutch TTF futures surged by 30% in the aftermath of renewed tensions in the Middle East, as Israel has shut off the Tamar gas field.
- LNG prices already saw a jump prior to the events in the Middle East, as strikes over pay and work conditions disrupted production at the Gorgon and Wheatstone plants in Australia, which account for more than 5% of global LNG capacity.
- In response, the EU is considering expanding the temporary emergency price cap for TTF futures beyond 2023.
- The EU has also entered into additional agreements with Qatar over new LNG deliveries, with flows expected to see an additional increase in 2026, when QatarEnergy will begin deliveries for France, the Netherlands, and Italy.
- EU energy ministers also reached a provisional compromise on Europe’s energy market reform, which aims to promote purchase power agreements and improve contracts for difference (CfDs).
Our View
Dutch TTF contracts, a key benchmark for European gas prices, eased to EUR 48.0 per MWh on October 25 from EUR 53.0 on October 17, but they remain in line with our previous expectations that contracts will breach the EUR 50.0 MWh mark during the start of the heating season. In this particular case, however, much of the increase in prices comes on the back of supply and geopolitical disruptions, with actual demand remaining soft amid structural decline and warmer weather across Europe. While short future contracts have seen a substantial increase in volume and remain fixed at EUR 55.0 MWh, longer-term contracts have not seen a substantial increase in trading, suggesting that the ongoing volatility likely represents a short-term concern about gas availability. With gas inventories remaining at 98% of total for the whole of the EU, and European markets securing new LNG delivery contracts, the risk to overall gas supply remains relatively low. The recent uptick, however, confirms our expectations that the era of cheap gas in Europe is over, and European manufacturing will continue to experience underlying challenges when it comes to input costs and external competitiveness.
In the meantime, the EU has made some progress when it comes to ongoing energy market reform, with the recent preliminary agreement signaling more price predictability in electricity markets and giving governments greater power in regulating domestic prices, supporting vulnerable households, and encouraging greater usage of long-term contracts to minimize price volatility stemming from input cost movements. The move should provide a bit more predictability in terms of household utilities but is unlikely to substantially alleviate the ongoing challenges experienced by domestic manufacturers.
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