One of the few positives European commentators have been able to cling to in recent times is the big drop in benchmark gas prices.

However, while a glut of gas in storage and mild autumn temperatures are helping for now, there are reasons to believe things could get worse again before they get better, adding to inflationary pressures.

Gas prices have fallen almost to their levels before the war in Ukraine, although they are still comfortably higher than their average before 2021, as a flood of LNG (liquefied natural gas) shipments to Europe have helped fill up storage facilities ahead of schedule.

A European Union target of 80% of total capacity by 1 November has comfortably been surpassed. The latest available data from Gas Infrastructure Europe, the association representing the interests of European gas infrastructure operators, shows EU gas storage is currently 94% full and the UK is at 100% of capacity. For context, the figure for the EU this time a year ago was 77%.

Mild weather and successful campaigns around energy usage in some European countries have helped reduce demand. Add in the limited number of regasification terminals available to process the LNG and it means there are lots of vessels floating around the continent waiting for a slot to unload.

How long this situation lasts remains to be seen, as a ramp-up in demand in other parts of the world could see them leave and head to Asia, for example. Even those which continue delivering gas to Europe will have to return to base in places like the US and Middle East to refill, and because all this happens by sea it will take weeks.

In this context it’s easy to see how, as winter hits and demand peaks, Europe could go from a position of feast to famine when it comes to gas supplies. This is reflected by a position of contango in the LNG market where prices for delivery in December and January are materially above those for November.

Longer-term the outlook may improve as efforts to diversify away from Russian gas bear fruit, but there needs to be a significant change in energy policy in the UK and Europe for that to happen.

GAM Investments European equities investment director Niall Gallagher says: ‘Governments would like us to believe the energy crisis has been precipitated by Russia. Russia invaded Ukraine, they stopped sending gas to Europe, therefore, their logic goes, we should blame the Russians.’

Gallagher argues it is not that simple and there has been under-investment in oil and gas since at least 2014.

‘We can hope that we move away from oil and gas quite quickly, but it needs to be managed and we need to recognise that 80% of the population still lives in the emerging world; their demand will grow as their economic development catches up with ours,’ he adds.

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