Private Banking

Europe’s natural gas prices are plummeting as abnormally mild weather is reducing demand

Europe is set for the warmest January in years, easing an energy crunch that has hammered the region for months.

While sparking climate concerns, the warmth over the past couple of weeks has been a boon for nations as they struggle against a crushing cost of living crisis that has seen household energy bills and inflation surge. It is a sharp turnaround from the freezing temperatures of early December that had raised concerns over natural gas reserves depleting too quickly. Governments and consumers spent much of the summer worried they would face blackouts after Russia’s sharp gas supply cuts following the war in Ukraine. But stockpiles are now fuller than normal, with some nations even sending gas into storage in recent days as demand eases with the weather. The heating demand in Europe is below the 10-year average, according to Maxar Technologies. Along with strong imports of liquefied natural gas and energy-saving measures from industry and households, there is increasing confidence that the continent can go through this winter unscathed and avoid gas shortage. High inventories (see the chart) at the end of the cold season – in Germany, storage facilities are about 91% full, compared with 54% a year ago - will make it easier to replenish storage sites in time for next winter.


As a result, European gas futures closed in January at the lowest level since October 2021, while power prices have also declined sharply (see the chart). They could ease further with Maxar forecasting blustery conditions in the UK and continental Europe, which will increase wind power generation and in turn curb gas use. According to S&P, higher wing and solar generation will help slash gas-fired power generation in ten of Europe’s largest power markets by 39% this year. The dynamic has shifted to such an extent that there is now too much LNG arriving! Steady supplies from non-Russian sources are likely to keep market prices from surging to last year’s peaks.


The specter of recession and demand destruction in large energy-consuming parts of the world may also continue to dominate near-term energy market sentiment and push energy prices down. The fear is that stronger anti-inflation medicine from central banks (see the bond section) will not just squeeze demand but add to a still strong dollar that is battering commodities.

  • As economic growth slows, prices for key raw materials — from oil to copper and wheat — have cooled in recent weeks (-25% in euro), taking pressure off the cost of manufactured goods and food. It is getting cheaper to move those things around, as supply chains slowly recover from the pandemic (see the chart). After the worst price shock in decades, the speed at which relief arrives will vary, with Europe still struggling. But for the world, consumer-price inflation will fall in the first half of next year. That doesn’t mean an early return to the subdued inflation that much of the world enjoyed before the twin shocks of Covid-19 and the war in Ukraine or the end of monetary tightening. Rents and labor-intensive services are likely to keep getting more expensive, with job markets tight and wages on the rise. And there are broader forces at work, from slowing globalization to lackluster growth in the labor force, that may keep price pressures bubbling.

  • Nevertheless, the recent shift in the commodities markets is consistent with what has been seen since the early 1940s: commodities are the one major asset class that reliably outperforms when inflation is high. But the caveat is once inflation begins falling from its peak the return for the asset class has tended to be zero.
  • Furthermore, China’s sudden lifting of virus restrictions during winter may also pose downside risks for energy/commodities demand. While the relaxation of Covid-19 restrictions caused an initial rise in mobility – we saw a sharp recovery in the world’s biggest domestic air-travel market –, the recovery may not be sustainable. Demand destruction may follow if infections spike (see the chart) and the medical system becomes overwhelmed. The country is bracing for more turmoil in coming weeks and months, with economy facing possible labor shortages and factory disruptions.

That is why we decide to tactically take some profit on commodities by reducing from overweight to neutral our exposure on Energy even if the energy crisis is probably far from over. While European gas prices are at the lowest level since 2021, they are still three-times higher than the 10-year average through 2020. While European Russia’s deep supply cuts continue to be a concern as replacing the huge volumes is difficult. Daily flows to the European Union are down around 80% compared with this time last year, and there is a real risk the remaining shipments will be halted. That’s a reason government are still urging citizens to keep conserving energy. The weather could also change quickly. And we are also aware that the decoupling of global energy prices and investment in production has been accentuated this year (see the chart), which could mean a tighter market is in store when demand eventually recovers. A rebound in China’s economy could stoke competition, with supplies tight until more capacity becomes available in 2025. Oil prices rebounded by 47% (in euro) in 2022, while capital expenditure in the oil industry only grew by 6%. The last time oil prices neared those seen in 2022, oil investment stood at $736 billion, almost two-thirds higher than current levels. As the energy transition takes center stage and the world moves away from fossil fuels, the energy investment malaise may carry on into the next few years.