Europe’s Energy Crunch

Europe's Gas Price Hits a Milestone, and Possibly a Floor

European natural gas hit a milestone on Friday, falling below €50 per megawatt-hour for the first time since August 2021.

Another significant marker is on the horizon. The barrel-of-oil-equivalent price for European gas is now about $88. Meanwhile, benchmark Brent crude is trading near $83. The continent hasn’t seen cheaper gas than oil since July 2021.

Oil and Gas Prices Converge

European gas is nearly cheaper than oil for first time since 2021

Sources: ICE Futures Europe, EDX-ICE Endex

The price decline is another sign that the region's energy crisis is easing, but it’s also a reminder of the shocks to the market in the last year or so. While gas may seem cheap by recent standards, it's still roughly double the five-year average for the time of year.

And there's a chance that prices could rise again, even as winter recedes. Cheaper gas encourages power generators to switch to the fuel from other alternatives like coal.

Source: Bloomberg News analysis of third-party data. A full methodology note is included at the bottom of the page.

“Gas prices have fallen into the fuel switching range suggesting that it is now more profitable to run the highest efficiency gas plants in comparison to the lowest efficiency coal plants,” said Stefan Ulrich, an analyst at BloombergNEF.

Profitability of Gas-Power Plants Vs Coal in Germany Improves

Comparison of a 36% efficiency coal plant vs a 49% efficient gas plant in Germany in March

NOTE: Spark spread is the margin between the cost of natural gas bought as fuel and the sale price for electricity generated by burning that gas. Dark spread is a measure of profitability for coal power plants. Source: Bloomberg model

The effects of the supply crunch could linger for many months. Benchmark gas futures are progressively more expensive through the rest of the year. Competition with Asia for liquefied natural gas could intensify demand, with new supplies limited.

Shell Plc this week forecast a growing gas-supply deficit for Europe for the remainder of the decade. Repsol SA said higher prices may be structural in nature, due to obstacles to production.

Historically High

Benchmark gas prices remained elevated, even after recent slump

Source: ICE Endex

The International Energy Agency this week even warned that there’s still some risk of a European gas shortage this year, albeit in a worst-case scenario if Russia were to cut all pipeline flows to the continent and winter weather roars back. But the concern is on the longer term.

``The reality is that winter 2023-2024 is likely to be the real test,” IEA Executive Director Fatih Birol said.

For now though, Europe can cheer that it has gotten this far without energy rationing or blackouts -- both of which were feared just six months ago, when benchmark futures topped €300 a megawatt-hour.

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