Macro views
Macro views

Europe natural gas: Facing a winter freeze

Quick takes on capital markets

July 28, 2022 | 2 min read

Soaring natural gas prices in Europe have delivered a significant blow to the region’s economy, but potential gas shortages in the winter months threaten a very severe recession. With such a grave threat hanging over the region, the investing landscape in Europe looks much less favorable than that of the U.S.

Europe and U.S. natural gas prices
US$ / MMBtu, 2021 – present

Chart showing Europe and U.S. natural gas prices from January 2021 to July 2022

NYMEX, Scoville Risk Partners, Bloomberg, Principal Global Investors. Data as of July 28, 2022.

The energy crisis in Europe is escalating. With natural gas flows from Russia to Germany through the Nord Stream 1 pipeline having fallen to just 20% of capacity, the threat of a gas supply shortage has become meaningfully more acute in recent weeks.

The increase in European gas prices has been particularly sharp. Since January 2021, natural gas prices have risen almost 760%, significantly more than the 240% increase seen in the U.S. The surge is deeply impacting Europe’s economy, pushing inflation to record highs, driving up household bills, and straining Europe’s industrial sector.

Price increases are not Europe’s only problem. Germany, which imports 55% of its gas from Russia (compared to the 40% EU average), also faces a potential gas supply shortage.

  • The European Commission estimates that, if supplies are sustained at 40% of capacity, Germany could narrowly scrape through the winter without shortages.
  • At 20% of capacity, Germany would face shortages, therefore needing some notable rationing, with clear negative growth implications.
  • If Russian gas flows stop entirely, the Bundesbank estimates that the necessary rationing of gas would lead German GDP to slump 5%.

As with any geopolitical risk, the situation elevates uncertainty for investors. However, with such a grave winter threat hanging over the region, the European investment proposition looks considerably less enticing than that of the U.S.

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