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Falling European Energy Prices & Market Sentiment

The energy crisis has ballooned into one of the key economic factors of 2022. With rising global inflation and the so-called cost-of-living crisis dominating headlines, rising gas prices are front and centre for markets. 

In Europe, record-high gas prices have been cited as one of the key threats to the eurozone economy, creating difficulty for central banks and governments alike. 

Over recent months, however, we’ve seen gas prices retreating, raising hopes of a deeper move back down towards more sustainable levels. 

To gain a view on European energy prices over the remainder of the year, we take a look at what’s been driving prices recently and how these factors look set to develop going forward. 

Factors driving European energy prices

  • EU Measures to Address Energy Crisis
  • EU Vs Russia – Sanctions & Supply Tactics 
  • Ukraine Vs Russia – Shift in Outlook on War
  • EU Stockpiling Progress

EU Measures to Address Energy Crisis

One of the key drivers behind the drop in European gas prices over the last month has been the anticipation of further EU measures aimed at addressing the crisis. The EU has been outlining proposals to help restore price stability, ranging from a cap on energy prices (agreeing on a limit the EU will pay for gas) as well as targeting demand, and forcing cutbacks on usage (energy rationing). 

With details of the planned intervention emerging over the last month, European gas prices have fallen by around 10%. This is clearly good news though it’s important to note prices are still ferociously inflated (around 80 times the seasonal average) and are still prone to volatility. 

European Commission’s New Windfall Tax on Energy Companies

There are also key structural changes taking place. While EU leaders have sought to reduce industry demand levels, helping further suppress energy prices, the European Commission has this week announced a windfall tax on energy firms. 

EU President von der Leyen announced that firms will be required to make a “solidarity contribution” of 33% of profits from fiscal year 2022, which will be used to help households struggling with energy prices. The measures also include electricity targets for EC member states aimed at reducing consumption by 5% during the hours covering the 10% highest usage each month. 

EU Vs Russia – Sanctions & Supply Tactics 

The tug of war between the EU and Russia over gas prices has made the situation incredibly hard to get a grip on. News last month that Russia was suspending gas supplies to the EU (via its Nordstream pipeline) indefinitely, saw prices spiking higher, reflecting just how sensitive the situation is. 

The EU is desperately seeking to protect itself against adverse reactions to any Russian moves on energy. Part of this has been a focus on replacing Russian energy supply with other sources, thus establishing more independence from Russian energy, and part of this has been down to demand targeting with the EU seeking to limit EU reliance on Russian energy via reduced demand for its energy. 

Ukraine Vs Russia – Shift in Outlook on War

The progress made recently with regard to addressing the energy crisis in Europe has been well reflected in both EUR and European asset prices, both of which have been rising. 

Developments within the Russia-Ukraine war have also been helping ease gas prices. With the Ukrainian army making significant advances in recent weeks by pushing Russian troops back and recapturing Russian-held regions, hopes are growing that the conflict might soon be brought to an end. 

EU Stockpiling Progress

Recent headlines around EU stockpiling have also helped calm energy prices. One of the big fears earlier in the summer is how the EU would cope over the winter months with reduced Russian energy supply. However, the latest data shows that European gas storage sites are more than 80% full, actually sitting above their five-year average, creating much less need for panic as the colder winter months approach. With a last-minute scramble for supply unlikely, prices should avoid seeing the seasonal spike which many feared would exacerbate the already precarious energy-price backdrop. 

Will Price Continue Lower?

The question now is whether the current trajectory in energy prices can continue, bringing prices further down or whether prices are likely to snap back. One key element here is the sustainability of the EU’s plans. 

Working to build energy independence from Russia is one thing, but energy rationing is a risky strategy which risks undermining EU businesses and creating further difficulties for EU households over the winter months. If the EU is successful in fulfilling its new demand targets, prices are likely to continue lower. However, if, for example, we see an unusually cold winter in Europe, this might lead to a lack of compliance and a fresh spike in demand. 

Goldman Release Bearish Forecasts

Goldman Sachs this week issued a report citing its projections for gas prices to halve from current levels by end of Q1. Goldman explains that the EU has already done the bulk of its winter inventories build and efforts to reduce energy usage and demand for gas in the coming months will both combine to bring power prices lower. 

Technical Outlook

Dutch TTF Natural Gas Futures 

The reversal lower in Dutch Nat Gas futures has seen the market breaking through the rising trend line support from YTD lows as well as below the 227.735 level support. The sell-off stopped just short of testing support at 182.510 and the price is now rallying. The key thing now will be to see whether the price holds a retest of the 227.735 level from below, and resumes the sell-off or if we break back above. 

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