European gas contracts for November delivery jumped to EUR 118.0 from EUR 17.0 six months ago as available supply continues to dwindle, causing a massive uptick in energy prices. Some governments across Europe have taken measures to address the spike in energy prices, with some proposing to create joint EU gas reserves. Ongoing concerns about gas supply continue to be compounded by Russia’s decision to suspend an increase in gas supply to Europe as it awaits approval of the Nord Stream 2 pipeline.
Our View
The considerable surge in both gas and electricity prices stems from limited supply and a considerable uptick in demand, driven by both the normalization of economic activity across Europe and the upcoming winter months. While gas futures indicate that the situation should see a notable improvement over the spring months of 2022, ongoing increases in gas prices, which in the UK surged by 37% this week, suggest that current price increases will continue to trickle down to European economies and heighten already-elevated inflationary pressures. While many European governments have implemented measures to protect households from the increase in energy prices, including price freezes in France, redirection of profits from companies to support consumers in Spain, and EUR 3.0 billion in direct support for consumers in Italy, such initiatives will be unable to offset the increase in prices for businesses, which will eventually be transferred to households.
Business Implications
Ongoing energy price pressures are likely to extend throughout the next six months. Those pressures will bite into consumers’ purchasing power and businesses’ turnover, which will likely dampen the previously elevated demand recovery and increase price sensitivity. Support for consumers in several markets, such as France, Italy, and Spain, will soften some of the impact of the utility price increases to consumers, but will also likely demand budgetary revisions in 2022 and may translate to higher B2G demand volatility.
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