Gas price shock, one year on…

Things are never as bad as they seem (especially when natural gas prices have gotten much cheaper in the meantime). One year after the natural gas price shock in Europe, a preliminary stocktaking of the situation can now be conducted. It turns out that last summer’s fearmongering about a looming natural gas supply shortage was greatly exaggerated in part. It can also be concluded that market forces worked effectively. The EU gas price cap has remained merely a theoretical construct thus far and is again unlikely to be triggered during the upcoming heating season.


Merely a technical recession

In late August 2022, the complete shutoff of Russian natural gas shipments through the Nord Stream 1 pipeline caused the price of European gas (TTF) to rocket to an intermittent peak of almost EUR 350 per megawatt hour. The panic that broke out among industry associations, labor unions, and economists (and politicians) in Germany, a country heavily dependent on natural gas from Russia, had already reached its climax a few weeks beforehand when drastic horror scenarios were making the rounds. The most pessimistic forecasts projected a 6% to 12% contraction in German economic output in the event of a complete absence of natural gas shipments. One is always wiser in hindsight – in the meantime, we now know that Germany went through only a tiny (technical) recession in the 2022/23 winter half-year. Reality thus validated the faction of much more levelheaded economic researchers who back in spring 2022 had rated a severance of energy ties with Russia as being manageable.1


The natural gas market works… | …even without a price cap

Benchmark European natural gas (TTF) futures price, in EUR per MWh

Source: Bloomberg, Kaiser Partner Privatbank


The market regulates everything a lot of things itself

In retrospect, the (German) market economy proved to be much more robust and adaptable than many had feared. Companies did some switching to other fuels (e.g. coal) or to products with an elevated energy content (urea). Moreover, stepped-up imports of European liquified natural gas (LNG) replaced approximately half of the previous imports of Russian natural gas. Households likewise modified their consumption behavior and lowered their natural gas use by 12% (compared to the average consumption volume for the 2019–2021 period). Dreaded “cascade effects”, in contrast, were not observed in Germany. Whereas production in energy-intensive sectors such as chemicals and glass plummeted, industrial output in other sectors was hardly affected. The decision by German policymakers to eschew a natural gas price cap unlike other European countries proved to be the right move. The (high) price by itself played a key steering role in the adaptive behavior outlined above. The swift action taken by Germany’s Federal Ministry for Economic Affairs to procure gas shipments from other countries in place of Russia and to build out LNG capacity was equally as helpful. A study by B. Moll, M. Schularick, and G. Zachmann2 found that market participants’ adaptability would have averted a natural gas shortage even if Germany had voluntarily renounced all gas imports from Russia from April 1, 2022, onward. Even the oft-cited “luck” factor – in the sense of a warmer-than-average winter – to which the gentle economic outcome is frequently attributed was not a crucial element, according to the authors of the study. A different study by economists at the International Monetary Fund (IMF) 3 also corroborates how important a functioning (global) market is. The study found that the existence of a global LNG market makes the total cost of a Russian gas boycott against Europe only one-third as high as it would be in a scenario in which there were no fallback alternatives.


The current (scorching) summer is just months away from the next (…) winter

Even though heating isn’t necessarily on one’s mind right now in the midst of yet another record hot summer, any examination of the natural gas issue ultimately also has to peer into the future, which looks rather good when viewed objectively. Natural gas has recently been trading at a price below EUR 30 per megawatt hour, and Germany’s gas storage facilities are already over 80% full at this early stage of the year. They could be 100% full by the start of autumn. So, the EU gas price cap at EUR 180 per megawatt hour is again unlikely to be triggered next winter in all probability and looks set to remain merely a theoretical construct. Relief for the European supply situation during the upcoming heating season is coming from China of all places, which competes with the EU for existing LNG production capacity on the world market. According to data from analytics firm ICIS, the People’s Republic will import around 73 million tons of liquefied natural gas in 2023, 6 million tons less than in 2021. The reasons for that are increased Chinese imports of pipeline gas from Russia, China’s economy’s weak recovery from the COVID-19 trough, and the country’s avid signing of long-term LNG supply contracts, which should result in China haggling less often with other countries on the spot market for available LNG allotment quotas. The amount of LNG that China will import less of this year than in 2021, according to the forecast by ICIS, appears to be of little consequence at first glance. After all, the world market for liquified natural gas comprises a total annual volume of 405 million tons. However, those 6 to 7 million tons mentioned above make up approximately 10% of Germany’s annual natural gas consumption. In a tight worldwide market for natural gas, this can already tip the scales as to whether there will be heavy volatility in price signals.


No stress this time | Storage facilities are already well filled

Natural gas storage fill level in Germany

Sources: Gas Infrastructure Europe, Kaiser Partner Privatbank


1) Rüdiger Bachmann et al. (2022): “Was wäre, wenn…? Die wirtschaftlichen Auswirkungen eines Importstopps russischer Energie auf Deutschland”

2) Benjamin Moll, Moritz Schularick, Georg Zachmann (2023): “Nicht einmal eine Rezession: Die grosse deutsche Gasdebatte im Rückblick”

3) Silvia Albrizio et al. (2023): “Sectoral Shocks and the Role of Market Integration: The Case of Natural Gas”

Oliver Hackel, CFA Senior Investment Strategist

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