Europe is paying the highest gas prices since early 2023, while still lagging on winter storage. A gas shortage is not expected, but expensive energy could fuel inflation and push up borrowing costs for governments, businesses and households.
European gas prices broke through €75 per megawatt hour on Wednesday, reaching their highest level since early 2023. At the end of June, gas was still trading below €40. Over the past month alone, prices have risen by roughly a quarter.
The main driver is the renewed conflict between the United States and Iran, and fears of further escalation around the Strait of Hormuz. The strategic waterway is a key route for global energy supplies. Markets are also watching the availability of liquefied natural gas (LNG) from the Gulf.
The European Commission acknowledged that high energy prices are a major concern. Its spokesperson Paula Pinho said the latest surge largely reflects tight global markets and the geopolitical situation.
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“One of the main suppliers of gas is being affected by what’s going on. If volumes fall off of the markets the prices increase,” she said, rejecting any link between rising prices and related EU legislation, such as methane emissions rules or the bloc’s green policies.
A race against winter
The price surge comes at an awkward moment for Europe. Gas storage levels remain well below normal, with only weeks left before the heating season begins.
As of 1 September, European underground gas storage facilities were 65.4 per cent full. That is more than 16 percentage points below the five-year average and the lowest level for this date since records began in 2011. A year ago, storage was 77.4 per cent full.
In response to the energy crisis five years ago, the EU introduced a security standard requiring underground gas storage facilities to reach 90 per cent capacity ahead of winter. Under the current rules, countries can reach that target at any point between 1 October and 1 December.
The rules also allow some flexibility in difficult market conditions or when technical constraints arise. For this winter, member states and the Commission have therefore agreed that reaching 80 per cent would be sufficient from a security-of-supply perspective.
Storage refill is falling behind
This year’s refill pace is lagging. Since the beginning of April, around 40 billion cubic metres of gas have gone into European storage facilities — just 59 per cent of the volume needed for the coming winter. According to analysts’ estimates, at the current rate, storage could reach only 70 to 75 per cent of capacity by the start of the heating season.
The Commission does not currently expect Europe to face a gas shortage over winter. Spokesperson Anna-Kaisa Itkonen said there is still enough time to fill storage in line with the rules. National experts will discuss the situation on Thursday.
Ms Itkonen also pointed out that EU gas demand has fallen by 17.17 per cent compared with pre-crisis levels. “So this is also a factor to be kept in mind.” Countries can deviate from the target by up to ten per cent. The Commission can also increase that flexibility by another five percentage points if necessary, the spokesperson said.
It’s the price, not the supply
The bigger headache may therefore not be whether Europe has enough gas, but how much it will have to pay for it. Energy companies are reluctant to buy expensive gas at current prices and inject it into storage. Instead, they are waiting to see whether the Middle East conflict eases and prices come back down.
„I have been saying for six months that we need to be more careful about storage or we will have high prices going into winter,“ Anne-Sophie Corbeau, a gas expert at Columbia University’s Center on Global Energy Policy, told the Financial Times.
There is little reason for complacency, she warned. „We have seen again and again that when problems arrive, they all come together,“ she added.
Europe is also competing with Asia for LNG this year. Hot weather has made matters worse, driving up summer electricity demand and complicating efforts to refill storage. Gas remains one of the main sources of power generation alongside nuclear, wind and solar.
Gas affects everything
The gas surge is now feeding into a much broader economic story. More expensive gas raises the cost of electricity, heating and energy-intensive industrial production. If high energy prices persist, they could gradually push up the cost of goods and services too.
Eurozone inflation already accelerated to 3.3 per cent in August, while energy prices rose 14.3 per cent year on year. That makes life harder for the European Central Bank. Financial markets are starting to price in the possibility that central banks will have to keep interest rates higher for longer than expected just weeks ago.
That, in turn, raises the cost of borrowing for governments, businesses and households. The yield on Germany’s 10-year government bond rose to 3.38 per cent on Wednesday, its highest level since 2011. Higher yields mean higher borrowing costs for new government debt. Over time, they also make it more expensive to refinance existing debt.
This creates an unpleasant feedback loop. Europe needs to buy large volumes of gas before winter. Yet prices are rising because of geopolitical uncertainty, which could make LNG supplies even harder to secure.
If storage levels remain too low, countries may have to buy more gas on the spot market during the winter. That could put further pressure on prices precisely when demand is at its highest.
