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Gas and energy prices in Europe tumble; What to expect next?

Gas and energy prices in Europe tumble; What to expect next

European energy and gas prices plunged over the past weeks as a reaction to governments stepping up to curb a crisis that threatens to throw the entire euro area into a recession

The bailout style of assistance, where excess profits of energy companies will be shaved off and distributed to consumers, seemed to do the trick, though perhaps only in the short term

Meanwhile, investment analyst Andreas Steno Larsen took to Twitter on October 5 to explain why he shorted oil and gas when prices peaked in September. Larsen pointed to the fact that skyrocketing prices in electricity did not reflect the fundamentals, equating it to what occurred to LIBOR during the 2008 crisis. 

German electricity price. Source: Twitter 

Gas market

According to Larsen, the European Union’s request to its member states to fill up their gas reserves could have potentially aided the run-up seen in gas prices. Now that most of the countries, except Hungary, managed to stock up roughly 80% of their natural gas capacity, the price action is reversing.

Natural gas prices. Source: Twitter

A similar sentiment was heard by Goldman Sachs (NYSE: GS) analysts, who claimed back in September that gas prices will most likely halve during wintertime as Europe managed to find a solution to the gas inventory buildup puzzle. 

“This is the puzzle Europe has successfully solved for the past year, with a combination of gas demand destruction within Europe and across [liquified natural gas] buyers elsewhere in the world, resulting in above-average inventory builds.”

Potential reversal

Yet, there is a potential for a reversal in gas price come wintertime when the heating season begins. This will, of course, be highly dependent on the severity of the cold period and the actual utilization of gas reserves. Still, if history is any guide, use will deplete reserves, and a new buying cycle will begin. 

Natural gas stock level movement in Germany. Source: Twitter 

Larsen concluded that due to a complete lack of supply from Russia, the battle on the gas market would initially increase gas prices, which will, in turn, increase energy prices, perhaps as early as November. 

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