Respite for businesses and households as gas prices take breather

European wholesale gas prices retreated after settling at a record high on Monday.

European wholesale gas prices are taking a breather amid further signs that soaring energy costs are crippling economic output, heaping pressure on politicians to resolve the crisis with winter just a few months away.

Prices retreated after settling at a record high on Monday. Prices are still about six times higher than they were at this time last year, with the panic spreading across nations ahead of peak winter demand.

Russia’s Gazprom will halt flows on the key Nord Stream 1 pipeline to Germany for three days of maintenance starting August 31, raising concerns the link may not return after the work. Lower flows would jeopardise Europe’s efforts to fill storage sites to prepare for the colder months.

The instability has shocked global markets, sending gas prices from Asia to the US soaring amid a race for supplies. In Europe, a prolonged cut in Nord Stream 1 shipments would exacerbate a crisis that has dragged on for months — stoking inflation, curtailing industrial production, and fanning the risk of recession. The euro is now trading near a two-decade low against the dollar.

Continental gas for delivery next month settled 6% lower at €260 per megawatt-hour, while the UK equivalent also declined, with some traders taking profits after the recent rally. German year-ahead power prices slipped 3%, after surging to a fresh record. 

Gas prices could rise to €400 per megawatt-hour if flows via Nord Stream 1 stop in September, according to Leon Izbicki, a gas analyst at Energy Aspects. 

“Current prices have a significant impact on industrial gas demand in Europe, with our models indicating a yearly reduction in western European industrial gas demand of 15% in 2022,” he said.

Curbing output

The list of industries that are curbing output is growing. Poland’s biggest chemicals company, Azoty, has stopped making some of its key products and trimmed production of ammonia because of record gas prices. In France, new orders declined this month in both services and manufacturing. French output is contracting for the first time in a year and a half, mirroring the trend seen in Germany as Europe’s biggest economies succumb to record inflation and increasing uncertainty. 

A recession in the eurozone is now more likely than not, according to a survey of analysts. 

• Bloomberg