Gas prices hit a three-year high. A tough winter lies ahead for Europe

Europe is about to face another very difficult winter from an energy perspective. Yesterday, gas prices hit a three-year high on the Amsterdam TTF, the European benchmark market: contracts for October delivery exceeded 75 euros/MWh before falling back to around 73 (last winter, the average price was around 35 euros). Prices were driven up by the second round of US strikes against Iran in three days, which has once again pushed back the prospect of the Strait of Hormuz reopening – through which a fifth of the world’s LNG supply passed until 28 February. Now, for the market, the hope of an end to the conflict by Christmas seems out of the question, as experts consulted by the Financial Times explained yesterday. In line with gas price movements, Brent crude has also risen again (above $94 per barrel), whilst fears of persistent inflation have continued to push up yields on government bonds in the most advanced economies, which are now at their highest levels in decades.

Meanwhile, European gas storage levels stand at around 65 per cent: Italy has filled its storage facilities to over 82 per cent, but Germany remains at around 52 per cent and there is a real risk that Berlin will fail to meet the EU target of 80 per cent. Davide Tabarelli, an energy markets expert and chairman of Nomisma Energia, speaking to Il Foglio about the German situation, says, however, that “it would be wrong to call it inefficiency. With cheaper long-term contracts available, few are willing to take the risk of buying expensive gas today that could be worth less in a few months’ time”.

Meanwhile, Eurostat reported on Tuesday that inflation in the eurozone rose to 3.3 per cent in August, driven by energy prices (+14.3 per cent). An interest rate rise at next week’s ECB Governing Council meeting is now considered a certainty. “Italy, with its energy reserves, will be able to help the rest of Europe, but when it comes to prices, it is the European benchmarks that matter,” analyses Tabarelli, “and those most at risk are always those with the highest debt, namely Italy.”

According to Riccardo Marcelli Fabiani, who is responsible for macroeconomic forecasts for the Eurozone at Oxford Economics, “the impact of rising gas prices will, all things considered, be limited,” he tells Il Foglio. “Unlike in 2022, weak global demand for gas and US LNG exports should prevent extreme price spikes.” He then adds: “Whilst this will lead to a rise in inflationary pressures in Italy and across the eurozone, these will be partly tempered by the economic climate.” He explains: “Domestic demand is holding up well, but it is not buoyant, and the state of the labour market suggests a gradual slowdown in wage growth. These factors play a key role in determining the persistence and intensity of inflationary pressures, whilst the energy component plays a limited role over time in the absence of these forces. This is the key difference compared with 2022, when economies were heavily out of balance due to the strong growth driven by the post-Covid recovery.” What do you expect for the coming months? “High-frequency indicators suggest that European economies remain in good health, so it is unlikely that we will see a significant slowdown,” replies Marcelli Fabiani.

However, among the major European economies, Italy remains the most exposed to rising gas prices: it accounts for twice the eurozone average in our price basket, and price rises are reflected in bills within a few months, whereas in countries such as Germany this can take up to a year due to differences in supply contract terms. The PUN (the single national electricity price to which variable-rate bills are linked) yesterday exceeded 210 euros/MWh, also reaching its highest level in over three years. “The only consolation is that we have already been hardened by the 2022/23 crisis,” reflects Tabarelli. “73 euros/ MWh for gas and just over 200 for the PUN are still a long way off the peaks of that time”, when – first due to supply cuts by Vladimir Putin and then to disruptions in flows following the war in Ukraine – prices exceeded 300 euros/MWh for the TTF and 500 euros/MWh for the PUN.

Tabarelli then concludes: “All things considered, prices are still low. But if the Strait of Hormuz remains closed, €100 for gas – which would mean €160 for electricity – is not a scenario to be ruled out. And if Asia or China start buying gas again, prices could soar even further.”