Europe Is Winning the Winter War by Sheer Luck

It may sound flippant to argue winter is over — after all, the weather has just turned cold in Europe, it’s still the middle of January, and February and March lie ahead. For the European natural gas market, however, the season is done and dusted.

This week, Europe is crossing the halfway point of its heating quarter. On average, the coming days are typically the coldest of the year. Almost like clockwork, wintry weather returns and snow bedecks the annual meeting of the World Economic Forum in the Alpine resort of Davos. Indeed, from London to Berlin, temperatures have now dropped to freezing. But even if the rest of the winter turns to be colder-than-normal, the region would have enough gas in storage to avert the worst-case scenario: running out as a result of Russia reducing exports as part of its strategy against Ukraine’s allies.

For gas traders, it’s a green light to sell. The wholesale price of natural gas in Europe fell earlier this week to a 17-month low of 55 euros ($60) per megawatt hour, down more than 80% from a peak of nearly 350 euros per MWh in late August. German wholesale one-year forward electricity prices, a regional benchmark, have also collapsed, trading at around 150 euros this week, down from a peak of almost 1,000 euros six months ago.

To be sure, if the colder-than-normal weather of the next few days persists into February and March, gas and electricity prices would rise again. But those gains would be limited. With half of the heating season already in the rear-view mirror, and gas inventories high enough, a gas price super-spike similar to what we witnessed last August is all but impossible.

Keep down your “Hip, hip hooray,” however. All this has come at a huge cost.

European governments have spent nearly 1 trillion euros subsidizing energy supplies. Despite that, both natural gas and electricity wholesale and retail prices remain well above pre-crisis levels. Due to lag effects, retail energy bills won’t drop until the second half of the year. And because governments have insulated families from the brunt of the wholesale market price spike, they will also see smaller price reductions in the future.

Nothing suggests a return to pre-2022 prices. For example, Cornwall Insight, a consultancy, forecasts that the annual gas-and-power bill for the average UK family would hover around £2,800 in the second half of 2023. They’d been paying less than £1,500 in the four years through 2021. Still, that’s a lot better than fears of bills topping £5,000 this year.

How did Europe go from crisis to relative calm in just six months?

First, the region got very lucky, for want of a better word, with the weather — a factor it cannot control and the result of the broader calamity of climate change. Spring-like temperatures on New Year’s Eve are a cause of celebration for anyone worried about gas prices. But they should be concerning for anyone worried about the environment.

From Dec. 19 to Jan, 16, the key gas-consuming region of North-West Europe enjoyed 29 consecutive days of above-normal temperatures. That came on top of the 37 consecutive days of warm weather from mid-October until mid-November. Considered in heating degree days (HDD) — a measure of energy demand compared against mean local temperatures — the winter has so far been about 12% warmer than the 30-year average. In terms of gas consumption, that makes a huge difference. By now, North-West Europe should have weathered at least 1,250 HDDs, but instead it has faced just 1,100 HDDs.