Are you feeling the pinch of rising energy costs? You’re not alone. Even with some recent dips, European gas prices are proving stubbornly high, casting a shadow over the economic outlook. Leading analysts at ING are sounding the alarm, highlighting persistent risks that could keep prices elevated and volatile. Let’s dive into what’s driving this and what it could mean for the broader market landscape.

Why Are European Gas Prices Still a Worry?

Last week brought a glimmer of hope as European gas prices saw their most significant weekly drop since early January, plummeting by over 9%. However, before you celebrate at the pump, ING commodity analysts Warren Patterson and Ewa Manthey point out a crucial detail: prices, particularly at the Dutch Title Transfer Facility (TTF), a benchmark for European gas trading, are still uncomfortably high. TTF is currently trading above EUR50 per megawatt-hour (MWh). This level is far from the comfort zone and indicates ongoing pressure in the energy market.

Here’s a quick breakdown of why these seemingly ‘lower’ prices are still a cause for concern:

• Elevated Baseline: Even after the recent decline, the baseline for gas prices remains significantly higher than historical averages. This impacts industries and consumers alike, contributing to inflationary pressures.
• Geopolitical Tensions: The elephant in the room continues to be the geopolitical situation involving Russia and Ukraine. Any escalation or disruption in gas flows from Russia can trigger immediate price spikes.
• Storage Vulnerabilities: European gas storage levels are lower than usual for this time of year, creating a precarious situation as we head towards the next winter heating season.

Russia-Ukraine Peace Talks: A Double-Edged Sword for Gas Prices?

The potential for peace talks between Russia and Ukraine is injecting a dose of uncertainty into the energy market. While peace is undoubtedly a welcome prospect, its impact on gas prices is complex and not necessarily straightforwardly bearish.

ING analysts highlight that:

“US and Russia talks working towards a peace deal between Russia and Ukraine will weigh on sentiment.”

This “weighing on sentiment” can be interpreted in a few ways:

• Short-Term Relief: The mere prospect of de-escalation can lead to short-term price drops as market participants anticipate a potential easing of energy supply risks.
• Uncertainty Persists: However, the analysts are cautious. Peace talks are notoriously complex and can be protracted. The actual outcome and its impact on gas flows remain highly uncertain. Therefore, relying solely on peace talks to solve the energy crisis might be premature.
• Potential for Reversal: If peace talks stall or break down, the initial relief could quickly evaporate, leading to renewed upward pressure on gas prices.

The Looming Shadow of Gas Storage Levels

Another critical factor flagged by ING is the state of gas storage levels across Europe. Historically, Europe aims to replenish its gas storage facilities during the summer months to prepare for winter demand. However, current storage levels are lagging behind the typical pace.

Consider these points regarding storage levels:

• Below Average: Current gas storage levels are “a little under 45% full,” significantly lower than the 5-year average of 54% for this time of year. This deficit raises concerns about Europe’s preparedness for the next heating season.
• Rapid Depletion: Storage levels have been declining at a “fairly quick pace” recently, exacerbating the situation.
• Weather Dependent: Colder weather forecasts will further strain storage levels as demand for heating increases, potentially leading to even faster draws on existing reserves.
• Subsidy Uncertainty: The analysts also point to uncertainty surrounding potential German subsidies for storage refills. The lack of clarity on whether and how Germany will subsidize storage adds another layer of complexity to the supply outlook.

TTF Trading and Backwardation: Decoding Market Signals

ING’s analysis also touches upon the concept of backwardation in the gas market. Backwardation occurs when futures prices are lower than spot prices, or when near-term futures contracts are more expensive than longer-term ones. In the context of gas, this usually reflects immediate supply tightness and expectations of prices easing in the future.

Here’s how it relates to the current situation:

• Flattening Backwardation: The backwardation between summer 2025 and winter 2025/26 prices has “flattened somewhat” recently. This suggests that the market’s expectation of future price declines is weakening.
• Subsidy Implications: A flattening backwardation could reduce the incentive for new subsidies aimed at encouraging storage refills. If future prices are not significantly lower, the economic rationale for subsidizing storage becomes less compelling.

Actionable Insights: Navigating the Volatile Energy Market

So, what are the key takeaways for investors and those watching the energy markets closely?

• Volatility is Here to Stay: Expect continued volatility in European gas prices. Geopolitical risks, storage concerns, and weather patterns will all contribute to price swings.
• Monitor Geopolitical Developments: Keep a close eye on the Russia-Ukraine situation and any news related to peace talks. These events will have a significant impact on market sentiment and prices.
• Track Storage Levels: Follow European gas storage levels closely. Lower-than-average levels can indicate potential supply vulnerabilities and upward price pressure, especially as winter approaches.
• Understand Market Signals: Pay attention to market indicators like backwardation and forward curves to gauge market expectations and potential shifts in sentiment.

Conclusion: A Cautious Outlook for European Gas Prices

While recent price dips offer some respite, the underlying issues impacting European gas prices remain unresolved. ING’s analysis underscores that prices are still elevated, and significant risks persist. The interplay of geopolitical tensions, storage levels, and market dynamics creates a complex and volatile environment. Navigating this energy landscape requires vigilance and a nuanced understanding of the factors at play.

To learn more about the latest Forex market trends, explore our article on key developments shaping Gold and US Dollar liquidity.