Europe chart of the week: gas price scenarios

王烜

• European gas prices have fallen sharply since November, as mild weather has slowed the drawdown of gas reserves that typically occurs during the winter. Still-high stocks have eased concerns that some major European economies—particularly those with large energy-intensive industrial sectors—would have to cut gas use.
• With gas prices currently influenced by weather developments, there is uncertainty about the gas price trajectory in 2023. EIU's baseline forecast is that gas prices will stabilise (at higher than current spot prices) in the second quarter. However, they are likely to rise again slightly in the third quarter as European utilities build up stocks ahead of the 2023/24 winter, before stabilising in late 2023. We expect the full-year average price to be about one-third lower than in 2022. This will ease inflation, allowing the European Central Bank (ECB) to [color=var(--ds-color-london-5)]stop raising interest rates in mid‑2023. Economic output will stagnate, but most economies will avoid a recession.
• However, if weather conditions remain favourable and Europe approaches the end of its winter season with high reserves, there will be greater confidence about the 2023/24 winter. In this scenario, gas prices could fall more rapidly than forecast in 2023. This might trigger more consumption (as lower retail costs boost confidence and generate a positive wealth effect), but overall we would see an abrupt fall in annual inflation mid-year, allowing the ECB to stop tightening monetary policy earlier. With confidence rising, consumption and investment would strengthen; many economies would register firmer GDP growth.
• Conversely, gas prices could spike again, either in response to a surge in demand (on the back of adverse weather and/or higher demand from Asia) or a sharp escalation in the Ukraine war (as rising geopolitical risk drives up commodity prices). In this scenario, inflation would remain higher for longer, prompting the ECB to continue raising rates well into the second half. More economies would slip into recession amid a prolonged cost-of-living crisis and heightened concerns about gas supply in the 2023/24 winter. A prolonged period of high gas prices would reinforce concerns about eroding [color=var(--ds-color-london-5)]competitiveness in European industry.
• We attach a 50% probability to our baseline forecast. We believe that gas prices are more likely to fall further than to spike. A cap on prices in Europe that will come into effect from mid-February will preclude a large spike in prices; this has been set at the equivalent of about US$55/mmBtu (roughly double the end‑2022 price, but well below the August 2022 peak of about US$95/mmBtu). We estimate a 35% probability of gas prices falling further, and a 15% probability that they will rise above forecast levels.