(Bloomberg) -- European gas prices are up about 45% this year, adding to the burden on households and industry as they strive to recover from the worst cost-of-living crisis in decades. There’s likely to be more to come with Russian gas flows due to cease on Jan. 1.
Most Read from Bloomberg
Futures contracts for next year are already carrying a premium, a strong signal that prices are poised to remain higher for longer, which ultimately translates into bigger bills for consumers. Some traders put the impact of no flows at as much as €10 a megawatt-hour higher than if flows continue.
The timing of the end of the Ukraine-Russia transit contract looks hazardous. The region’s gas reserves, a buffer for tighter times, are getting depleted at a faster-than-normal pace due to periods of cold and windless weather, which can make it trickier for traders to secure supplies for next winter. The weather is set to turn colder, potentially increasing gas demand for heating.
“High prices inevitably strained industrial competitiveness and economic performance,” MET Group analysts said in a note on Monday. Looking forward, “delays in capacity additions or stronger-than-expected demand from Asia – driven by economic recovery or cold weather – could tighten the market.”
The 15 billion cubic meters of gas that Russia currently sends through Ukraine each year make up less than 5% of Europe’s overall needs. Still, though it has been clearly signaled, losing one of the last remaining routes for Russian pipeline gas would put more pressure on an already tight gas market and propel global prices higher, Energy Aspects Ltd. analysts said in a note this month.
Their base case is for benchmark futures at the Title Transfer Facility virtual trading point in the Netherlands to remain elevated. That reflects a “lack of flexibility in the global balance,” due to factors including the difficulty in refilling storage sites by the end of October next year.
Almost three years since the war in Ukraine upended the region’s energy market, sending prices soaring, balances remain very tight. Europe has worked to diversify its sources of supply, buying more seaborne cargoes, increasing its reliance on Norway and building out renewables. Still, prices have continued to be extremely sensitive to any perceived production risk, particularly at a time when Asia has been boosting LNG purchases as extreme heat waves become more frequent, and top-importer China has added storage capacity, intensifying competition for the fuel.