European gas prices have surged over the past two sessions after Russian state-owned energy giant Gazprom said on Monday it would slash gas deliveries to Europe through its main pipeline, which would further reduce deliveries to Germany.
Capital Economics has warned that Europe may struggle to meet its gas demand, with the European gas price TTF, the region's benchmark wholesale gas price, set to remain high for years to come.
"We have revised up our TTF forecast to reflect the fact that Russia is now clearly not supplying gas to European markets," Jennifer McKeown, head of global economic services at Capital economics, and Caroline Bain, chief commodities economist, said in a note to clients on Tuesday. "This risks undermining Europe's efforts to fill 80% of its storage capacity by November (before winter-related demand surges)."
The EU plans to meet its 80% minimum storage target over the next few months to ensure enough gas for winter, but data from Gas Infrastructure Europe showed the EU's gas storage level was only 66.7% as of July 26. .
"We expect Europe to struggle to meet its gas needs, which will keep TTF prices up for some time, given the constraints on obtaining gas from alternative suppliers (pipeline and LNG import capacity)," McKeown and Bain said. It is now forecast that European gas prices will remain around €150 per MWh by the end of 2022, before still falling to an all-time high of €100 by the end of 2023.”
A potential gas shortage in Europe increases the likelihood of a recession in the region as inflationary pressures persist, Capital Economics said. The IMF warned on Tuesday that the global economy could face a severe recession. The organization lowered its forecast for global economic growth in 2022 to 3.2% from 3.6%. The IMF expects global output to be just 2.9% in 2023.
On Thursday, the European Central Bank raised its benchmark deposit rate by 50 basis points, the first increase in 11 years. Meanwhile, the Federal Reserve began a two-day policy meeting on Tuesday, which is expected to end Wednesday with another 75 basis points of interest rate hikes to curb higher-than-expected inflation.
Some of the world's largest LNG exporters could benefit from higher gas prices, Capital Economics said. Economists write that countries such as the United States, Australia and Qatar "should see increased investment by energy companies, or higher government revenues, at least partially offsetting the drag on real economic activity from higher inflation and lower real household incomes."
However, these countries have not been able to ramp up production fast enough to ease or fully profit from global supply constraints. As McKeown and Bain point out, Qatar has said it cannot increase supply until 2025. Exports are also likely to be restricted to prevent sharp increases in prices for domestic consumers.
In theory, Asian metal makers could fill the gap left by EU countries such as Germany, but Asian countries still have export and production restrictions, making it difficult to fill the shortfall.
"Any benefits from restricting Russian gas supplies and increasing gas prices will be more than offset by costs at the global level," McKeown and Bain said. "A recession in Europe will weigh on average growth, while a reduction in Russia's energy supply may Reversing the recent encouraging easing of global supply shortages."