The price of gas in Europe has surged for the fourth consecutive day amid increasing concerns over the impending end of Russian gas supplies via Ukraine and forecasts for colder weather across the continent. On December 21, the price reached €45.95 per megawatt-hour, marking over a 10 percent increase across the previous four trading sessions.
This recent surge is primarily driven by the looming expiration of the gas transit agreement between Ukraine and Russia, which is set to end shortly. Ukrainian President Volodymyr Zelensky has declared, "Our country will not transport Russian gas any longer, except under guarantees ensuring the Kremlin doesn't benefit financially during the war." This statement reflects the increasing tension surrounding energy supplies tied to the broader conflict.
With the transit agreement likely not to be extended, Central European countries, including Slovakia and Austria, continue to receive gas through the pipeline running through Ukraine. Despite attempts to shift away from Russian gas following the onset of the Ukraine war, these nations still depend on it to some extent. Reports indicate they may need to resort to more expensive liquefied natural gas (LNG) as alternative sources when the transit ceases.
Adding to the apprehension is the forecast for colder weather, which raises the demand for heating fuel, thereby compounding pressure on supply and prices. According to Florence Schmit, an energy strategist at Rabobank, "The current prices reflect the end of the deal, and the market will certainly see a short spike once January arrives and the transit actually stops." These factors contribute to the volatility currently faced by the gas market.
Previous price spikes earlier this winter reached levels above €340 per megawatt-hour due to decreased deliveries from Russia, and the current price is still below the highest figures seen this year, which peaked at over €48 per megawatt-hour at the end of November. Yet, the 10 percent uptick reflects increasing market nervousness as the decoupling from Russian gas becomes increasingly fraught.
The interplay of declining reserves and cold weather leads to greater anxiety. While the gas market remains sensitive, current meteorological conditions have provided somewhat of a buffer, as milder weather earlier had alleviated some pressure on reserves. On balance, the gas reserves are now around 75.9 percent full, closely aligning with the long-term average of 75.1 percent.
Electricity markets have felt the contrasting effects; electricity prices recently dropped significantly due to increased wind energy production translating to abundant supply, contrasting with the spikes seen on gas prices. Currently, with the majority of Europe facing declining economic activity as the year winds down, overall demand for electricity, which typically dips around this time, may contribute to more favorable pricing environments for consumers.
Looking forward, gas prices are expected to continue fluctuantly according to both weather patterns and geopolitical developments surrounding the gas transit agreement. With Ukraine having firmly stated its position, it remains to be seen how compliant current energy policies across Europe will be as reliance on Russian gas is gradually phased out. The coming months will be pivotal as the winter advances, and the actual consequences of the agreement's expiration become clear.
With the potential for heightened market volatility and consumer impacts, the decisions made by European leaders, as well as the outcomes of negotiations between Moscow and Kyiv, will be closely watched. The urgency for Europe is palpable as it navigates this complex and shifting energy dynamic.
