The contrast in 2022 is stark, and the policy limits for the current round of natural gas price increases in Europe

On Monday, October 26th, the price of the European natural gas benchmark contract TTF has risen to around 97 euros/megawatt hour, a significant increase from the beginning of the year and close to the high range of the 2022 energy crisis. However, the EU's gas storage level is only about 74.6%, significantly lower than the seasonal average of about 90%. During the same period, Brent crude oil experienced a decline after reaching a six-month high, with supply disruptions in the Middle East and low inventory levels, forming the core fundamental characteristics of the current energy market.

Fundamental drivers of price increase

The cumulative increase in European natural gas prices this year has exceeded twice, mainly due to the ongoing impact of the Middle East conflict on the transportation of liquefied natural gas in the Strait of Hormuz. The capacity utilization rate of major exporting countries such as Qatar has decreased, and the substitution of European imports is limited. At the same time, the progress of regional gas storage filling is lagging behind, with only about 74.6% as of late October, and demand centers such as Germany have a lower rate of about 61%, which is about 15 percentage points lower than the five-year average. Fatih Birol, the head of the International Energy Agency, recently pointed out that the inventory levels in Europe entering winter are lower than the historical average, and the ability to withstand further supply shocks is limited. Although the increase in renewable energy installation and the decrease in natural gas demand have partially buffered external shocks, the current inventory gap still makes prices highly sensitive to weather and supply changes. Compared to the peak of 345 euros/megawatt hour in 2022, the current price still has a significant gap, but it is sufficient to put pressure on industrial electricity and heating costs.

The limited scale of policy response and fiscal constraints

According to calculations by Brussels think tanks, European governments have committed approximately 12 billion euros in incremental measures to alleviate the impact of energy bills. Compared to the total size of approximately 650 billion euros in consumer price caps and subsidies during the 2022 crisis, the intensity of this round of policies has been significantly restrained. This difference reflects that the current market impact of supply disruptions has not yet reached the level of a comprehensive crisis, and at the same time, the fiscal space of many countries has narrowed and borrowing costs have risen. French Finance Minister Roland Lesquier has made it clear that the government is "financially constrained" in addressing cost of living demands, including rising fuel prices, and has mentioned the possibility of advancing the annual minimum wage hike by several months, while considering providing subsidies to high mileage drivers. At the EU level, the implementation time of methane emission rules is being adjusted to reduce potential obstacles to imports, and some parties are facing pressure to re-examine the comprehensive ban on Russian liquefied natural gas from January 2027 to ease living costs.

Changes in Supply Structure and Winter Scenarios

Since the last crisis, Europe has expanded renewable energy capacity and lowered natural gas consumption to reduce vulnerability to external shocks. However, the reality that the storage level is only about 75% still poses winter risks. Consulting firms in the energy sector have pointed out that if winter temperatures are below average and supply continues to be tight, benchmark prices may rise above 200 euros/megawatt hour, which will significantly increase the cost of industrial competitiveness, especially compared to the level of about 8 euros/megawatt hour in Port Henry, USA. The budget constrained government has limited willingness to restart large-scale price ceilings or subsidies. The EU still retains certain policy levers, including delaying new methane regulations and assessing the room for adjustment of Russia's liquefied natural gas ban. The market focuses on actual temperatures, the pace of liquefied natural gas arrivals, and the speed of inventory extraction, rather than just price forecasts.

Frequently Asked Questions

Question 1: Why haven't the current natural gas prices in Europe triggered large-scale fiscal intervention?

Answer: Although the price has significantly increased to about 97 euros/megawatt hour, it is still far below the peak in 2022. The impact of supply disruptions is relatively controllable, and there are obvious budget and borrowing cost constraints in multiple countries. The policy scale is only about 12 billion euros.

Question 2: What does a low level of gas storage mean for winter?

Answer: About 74.6% of the filling rate is about 15 percentage points lower than the seasonal average. If the temperature is low and the supply continues to be tight, the risk of price fluctuations may increase, and industrial cost pressure may increase.

Question 3:TickmillWhat are the specific considerations for the adjustment of French policies?

Answer: Finance Minister L ü tzow pointed out that it is difficult to fully respond under fiscal constraints, and considers raising the minimum wage in advance and subsidizing high mileage drivers, while leaving room for adjustment in rules and import bans at the EU level.