Prices on the European gas markets are currently higher than they have been for two and a half years. A period of volatility is expected in the near term. Why is this happening? MET Group analysts explain.
Prices on the European gas markets are currently rising and are higher than they have been for two and a half years. What are the reasons for the rise?
The primary reason for the increase in gas prices is a tightening of the supply-demand balance, which is a consequence of several factors. This winter began with lower inventory levels compared to previous years, mainly due to a combination of low prices and strong demand from Asia over the summer, limiting the injections into storages in Europe. In addition, since the 1st of January 2025, Europe has lost some Russian supply (stop of gas transit via Ukraine), further constraining supply availability. The weather over the winter was also slightly colder than in previous years, leading to increased demand, particularly during periods of low wind and cold temperatures. As a result, gas storage levels are significantly lower this time of year than in previous years.
The EU has taken measures, promoted LNG imports, held out the prospect of price caps. Are these measures not working?
While Europe has actively pursued increased LNG imports and introduced policies to attempt to stabilize prices, several challenges remain. Many LNG suppliers prefer to sell to the highest bidder, meaning that when Asian markets offer better prices, shipments are diverted away from Europe, as was observed in Q2 and Q3 of 2024. Additionally, the price cap mechanism can have unintended consequences – when external factors exert pressure on supply and demand dynamics, it may disrupt the market’s self-regulation mechanisms.
Do you anticipate a further rise in gas prices in the coming weeks and months?
A period of volatility is expected in the near term. Current regulations mandate that gas storage levels reach 90% by the start of November, necessitating unprecedented injection levels over the summer. This will probably increase demand and, consequently, put upward pressure on prices. Furthermore, geopolitical uncertainties add another layer of unpredictability.