European gas prices are surging as inventories dwindle faster than anticipated, driven by colder weather, reduced renewable energy production, and the end of Russian gas transit through Ukraine. With stocks now below the pre-war seasonal average, Europe faces mounting pressure to secure supplies ahead of the 2025-2026 winter.
- In early January 2025, the Dutch TTF, the benchmark European natural gas contract, topped 50 EUR/MWh, marking a +50% year-on-year increase and its highest level since October 2023
- European natural gas inventories have declined rapidly in the early fall/winter months, falling below the pre-war 10-year average fill level
- While there is no immediate risk of an energy shortfall in Europe, gas inventories are likely to end the year lower than in the previous two winters, necessitating significant purchases ahead of the 2025-2026 winter
Gas prices in Europe have returned to levels not seen in over a year. The larger-than-expected drop in European stocks, the cutoff of Russian gas supplies via Ukraine, and the need to fill up for 2025 are all contributing to upward pressure.
Simon Lacoume, sector analyst at Coface.
Dwindling European gas inventories early in the cold season
The end of Russian gas transit through Ukraine1 since January 1st has contributed to push European gas prices to their highest level in 15 months. Since the war started in February 2022, Europe’s dependence on Russian gas has declined – from 45% of total gas imports in 2021 to about 18% in 20232. Europe responded to lower energy imports via pipeline through a combination of energy-saving measures, increased gas stockpiling during summer months, an accelerated rollout of renewable energy sources, and higher imports of liquefied natural gas (LNG).
Lower-than-expected temperatures in recent weeks have notably led to increase heating gas consumption across Europe. In Frankfurt, heating degree days reach 878, far above 735 heating-degree-days last winter. Additionally, Europe has experienced a "dunkelflaute" – a German term for weather events characterized by cold temperatures, low sunlight, and weak winds –, which has negatively impacted wind and solar power generation across Northwest Europe.
To compensate for this drop in renewable electricity production, Europe had to dip into its gas storage. These combined factors have led to lower-than-anticipated stocks, about 17% below their level a year ago and slightly below their pre-war seasonal average. While there is no material risk of supply shortages, gas storage is likely to end at lower levels than in the previous two winters, when fill levels ranged between 55% and 60%.
Futures suggest prices to remain high in 2025/26
As futures on Dutch TTF contract prices suggest, European gas prices are expected to stay about 50% higher than in 2024, and over two times higher than pre-Ukraine war levels3. Traders who had postponed gas purchases, expecting a seasonal price decline, have been forced to buy at high prices in past few months. Additionally, the subsequent refilling demand could drive prices higher.
In 2025, market dynamics will be guided by the role played by Asia and whether or not US LNG exports increase.
Looking ahead, Asia’s role in gas demand and increased US LNG exports will drive market dynamics. To secure LNG supplies, Europe will have to compete at rising price levels. Even if Chinese growth prospects (4.3% yoy) suggest a slowdown in LNG demand and mild temperatures in Northeast Asia have allowed LNG cargoes to be redirected to buyers in Europe, stronger demand could push a larger increase in prices. At the same, Europe’s reliance on U.S. LNG is expected to grow. The U.S. has been the main beneficiary of the decline in European imports of Russian gas, with the share of American gas imports rising from 6% to 19% over the same period4. New liquefaction capacity expected to come online in North America the next few years is likely to shift European supply source, as the EU has, in parallel, a nonbinding goal of stopping all Russian gas imports by 2027.
With full production in North America not expected to be reached by the end of the year, gas markets in Europe, Asia and the US are likely to remain tight in 2025, keeping prices up.
1 https://www.reuters.com/business/energy/russia-halts-gas-exports-europe-via-ukraine-2025-01-01
2 https://www.consilium.europa.eu/en/infographics/eu-gas-supply/
3 Compare to 2015-2019 average price
4 2019-2023
