Surging natural gas prices add to Germany’s gas supply concerns

Natural gas prices in Europe have reached multi-year highs as the heating season draws near, raising concerns in Germany regarding energy expenses and limited gas storage. The Dutch TTF front-month futures, which serve as the benchmark for European gas, are presently trading around 80 euros (92 U.S. dollars) per megawatt-hour (MWh), slightly lower than the 83 euros (95.5 dollars) observed on Monday, a record since December 2022.

In the European Union (EU), natural gas prices have more than doubled since the onset of the Iran war, paralleling increases in oil and other energy prices due to escalating geopolitical tensions.

Germany's natural gas storage inventory stands at approximately 56 percent full, the lowest level ever recorded for September since tracking began in 2011, according to Gas Infrastructure Europe (GIE) data. Even with over 40 gas storage facilities in Germany, they remain just above half full as the ongoing closure of the Strait of Hormuz exerts additional pressure on an energy system that has undergone significant transformations since the Russia-Ukraine conflict began in 2022 and Germany sought to diminish its dependence on Russian energy sources.

Traditionally, gas operators would fill storage facilities during the summer when demand and prices are comparatively low, selling it during the winter months when both are high. However, the sharp surge in gas prices has diminished the economic incentive to refill storage facilities. The Iran war and its impact on traffic through the Strait of Hormuz, a vital waterway for international oil and natural gas shipments, have dramatically increased gas prices, rendering summer storage an unattractive proposition for market participants.

This combination of soaring prices and low storage levels has alarmed some politicians and market participants about gas supplies and affordability during the upcoming winter. During a recent Bundestag debate, Alice Weidel, co-leader of the Alternative for Germany (AfD) party, highlighted the low storage levels and advocated that replenishing gas inventories should be a top priority.

She warned that a harsh winter could compel Germany to make expensive emergency gas purchases or resort to rationing, inflicting significant hardship on businesses and households.

As the Iran conflict persists and tensions in the Red Sea intensify, experts have cautioned that EU natural gas prices may climb further to 100 or even 120 euros (115.1 to 138.1 dollars) per MWh should supply disruptions worsen.