Since the Russia-Ukraine conflict started in February this year, natural gas prices soared on the back of high market uncertainty with supply concerns as Russia is the top global exporter. Supply fears have intensified as Russia completely cut gas flows via the Nord stream 1, the main pipeline taking gas from Russia to Germany. This has massively reduced the amount of gas that can be directed to Europe and caused further market uncertainty. The price of natural gas reached GBP 594.4/100 therm on the 8th of September 2022, up 17.1 % week-on-week (w-o-w) and 298.4% year-on-year (y-o-y). Whilst some countries across Europe are not as dependent on Russian gas supply to meet domestic demand, the increasing interconnection of the European gas market means that the majority of the European markets are positively correlated, and therefore prices rose across all markets.
Supplies via the Nord stream 1 pipeline were initially limited to just 20% of full capacity. In response, the EU set out emergency plans on the 20th of July requesting countries to voluntarily cut their gas use by 15% compared to average levels until March 2023. This has helped accelerate buffer stocks, with Europe’s underground storage caverns surpassing 80% at the end of August, above the initial target set of 80% (according to data from Gas Infrastructure Europe). When winter arrives and heating demand rises, countries will draw from these reserves, helping offset some of the reduced supplies from Russia.
Soaring energy prices have also led to a worsening economic outlook and fears of a recession are now weighing on demand. Across the global market, high fuel prices, inflation, and slowing economic activity could lead to a decline in demand.