Europe's Thin Gas Stocks Raise Winter Price and Political Risks

Europe has fallen behind on refilling its natural gas reserves, and the shortfall is feeding directly into prices, inflation forecasts and political strain across the continent.

Storage sites that normally cushion the winter peak are 69% full, according to industry body Gas Infrastructure Europe, well under the 85% average for this point in the year over the past five years. Germany and the Netherlands, which between them account for 35% of the bloc's storage capacity, are among the biggest laggards.

The gap stems from a bet that the war involving the United States, Israel and Iran, which began at the end of February, would be brief, allowing prices to fall and companies to refill cheaply. That assumption now looks fragile. High prices have discouraged private buyers from stocking up, while governments have held back from enforcing national storage targets.

"Each month that Europe delays restocking raises pressure on prices as peak winter usage approaches," said Jonathan Schroer, a strategist at UniCredit.

The gas benchmark is trading at €81 ($93) per megawatt hour, 150% above its level a year ago and beyond the European Central Bank's "adverse" scenario. Morgan Stanley has said it could reach €100/MWh depending on the weather, warning that "relying on weather for supply security is a risky bet."

Refined fuel costs have climbed in parallel. With global oil above $100 a barrel amid the Middle Eastern conflict, petrol across the EU is 24% costlier than a year earlier and diesel 38% higher, partly because of Ukrainian strikes on Russian energy infrastructure. Jet fuel has more than doubled.

The inflation consequences may be longer-lasting than those of an oil shock. Research published by the Bank of Italy in June found that gas price shocks produce stronger and more persistent effects, seeping into the underlying inflation the ECB watches most closely. Investors expect the central bank, which raised rates last week, may need to lift them another three or four times.

"My attention is now focused less on oil and fuel prices, but increasingly on gas and electricity prices," ECB policymaker Peter Kazimir said.

Analysts at the Oxford Institute of Energy Studies warn that even an ordinary cold winter could deplete storage heavily, forcing a 2027 refill that would keep liquefied natural gas markets tight for months.

The burden falls unevenly. Airlines, chemicals, autos and building materials are seen as most exposed, while energy firms, utilities and banks stand to gain. Germany is particularly vulnerable because of its energy-intensive industry, and other governments have limited fiscal room to respond.

Italy's ruling coalition, trailing in the polls, said this week it would scrap road tax for 14.5 million cars and motorcycles from next year at a cost above €2 billion, on top of a diesel excise cut that has already run to €2.8 billion. French Finance Minister Roland Lescure cautioned against broad relief, saying such measures are "a false economy" because "ultimately, we'll have to fund them."

Compared with the shock that followed Russia's 2022 invasion of Ukraine, Europe is in some respects better placed: energy sources have been diversified and a softer labour market has limited wage demands. Even so, governments are counting on a mild winter, and the political cost of high energy bills is already visible in Germany, where the Alternative for Germany won a state election last week on a platform calling for peace with Moscow and the return of cheap Russian gas contracts.