European natural gas prices surge over 50%, analysis says extending Russian gas imports is "highly unlikely"

Source: Global Market Broadcast

The Middle East conflict earlier this week pushed European natural gas prices to their highest level since 2023, putting Europe back in an energy crunch situation four years after the outbreak of the Russia-Ukraine conflict.

Due to the near halt of shipping through the critical Strait of Hormuz and Iran’s attack on Qatar forcing the world’s second largest liquefied natural gas supplier to stop production, European natural gas prices have risen 53% since last Friday.

Eurasia Group energy expert Henning Gloystein said: "This is a double whammy. Europe had just emerged from the industrial energy crisis and is now facing a new crisis."

On Wednesday, a liquefied natural gas carrier originally bound for France diverted in the Atlantic towards Asia, becoming the first cargo ship to change its route, showing that Asian economies are intensifying competition and scrambling for supply.

According to commodity intelligence company Kpler, the "BW Brussels" carrying Nigerian liquefied natural gas turned south, heading towards the Cape of Good Hope.

As competition for liquefied natural gas sources intensifies, Europe has just experienced an unusually cold winter, resulting in a large consumption of natural gas reserves.

Bruegel Institute senior researcher Simeone Tagliapetra said: "At this time of year, inventory has never been this low. The time to start replenishing natural gas reserves for next winter is now. If replenishment has to be done at the current price, this will be a huge burden for Europe."

According to data from the European Gas Infrastructure Association, EU natural gas storage levels are currently below 30%, while the average over the same period in the past five years is about 45%.

The storage levels of countries such as the Netherlands, Sweden, Croatia, and Latvia are particularly low.

An EU official said that it is still possible to replenish storage levels to 90% before next winter and stated that during the meeting on Wednesday morning, member states did not request coordinated measures to cap prices.

Dutch Prime Minister Rob Jetten said on Tuesday that there is no risk of the Netherlands running out of natural gas, though he mentioned the government is preparing some support measures but did not specify. He said: "The current main focus is to replenish natural gas reserves as soon as possible."

A senior energy trader said that normally EU gas storage facilities rarely continue drawing down gas after the end of March. Under current warm weather conditions, "we have almost stopped extracting gas altogether."

Since 2022, the EU has achieved supply diversification, no longer relying on Russian natural gas, but instead massively importing gas from the United States and securing more supplies from Norway.

Only about 10% of Europe's liquefied natural gas comes from Qatar. However, if competition for other sources continues to drive up prices, inflation could rise sharply and suppress economic growth, especially in countries like Italy and Germany which rely more on liquefied natural gas imports.

In fact, before the surge in natural gas prices this week, the eurozone's inflation rate in February had already risen to 1.9%, above market expectations.

European Central Bank chief economist Philip Lane warned that if the Middle East war lasts for a long time, it may lead to “a sharp rise in energy-driven inflation, while economic output plummets.” However, the current European natural gas price is about 48.77 euros per megawatt hour, still well below the 2022 peak of 340 euros.

Some analysts speculate that one extreme option to enhance Europe's gas supply is to extend imports of Russian gas. The EU originally planned to gradually ban the import of Russian liquefied natural gas starting in April, beginning with short-term contracts and covering all contracts by the end of the year.

But consulting company Rystad said this proposal would be extremely controversial politically and would also face opposition from the United States. Since the reduction in Russian supply, US exports of liquefied natural gas to Europe have increased substantially, so this plan is “highly unlikely.”

On Wednesday, Russian President Vladimir Putin said that Russia might cut off gas supplies to Europe before the EU embargo takes effect, though he said he was “just speaking casually.”

This conflict may push Europe closer to the United States. German Chancellor Friedrich Merz discussed trade relations with Donald Trump in Washington on Tuesday.

If the Middle East conflict continues, analysts expect governments to take other measures to control prices, but many of these measures could conflict with Europe’s climate goals.