Putin has lost all leverage over European gas prices
Can there be anybody left who thinks Vladimir Putin is a strategic genius? Two years ago he was gearing up to invade Ukraine and was measured up for the garlands that would be strewn around his neck as he paraded in triumph in Kyiv in front of a weeping, delirious, grateful population. Well, it didn’t happen that way, did it? And underestimating Ukraine – to a delusional extent – and the West’s response is just one area where Putin’s grandiose dreams have slammed into reality. Another is international gas markets where Putin believed he had a stranglehold over Europe and Germany in particular.
In fact, Germany and other European countries, including the Baltic States, simply paid any price to make sure that they were stocked up for the 2022-23 winter and then went looking globally for international gas supplies. Markets being markets – and sanctions being sanctions – the response to this change in demand was met and led to a collapse in sales for Russian companies. This means a lot less money for Vladimir Putin and a massive rise in sales for US natural gas producers. This has led, with the help of another very mild and very windy European winter, to a glut and a gas price that now sits at 58p per therm. That’s roughly two and a half times lower than the 52-week high and is not so far above the long-term norm pre-Covid of around 50p/therm. There’s no cavalry coming either: incredibly, according to ICE, natural gas in winter 2025-26 is now trading at 75p/therm. Compare that to the 600p/therm wholesale price paid in August 2022.
All this means that Russian companies can no longer really access European markets (their share has gone from 40 per cent to 8 per cent). They have no leverage now over European gas prices except via state-sponsored sabotage and they will never be able (or allowed) to access European markets in any meaningful sense ever again. No wonder then that The FT reports that the biggest Russian oil and gas company Gazprom has “ceased to be profitable, and that net losses could hit one billion roubles by 2025.”
Any new markets that Gazprom wants to get into will require massive investment in infrastructure by Gazprom and any increase in sales that results will get nowhere near filling the hole left by Gazprom’s former customers in the West. The reality is that Putin has, through spectacular miscalculation and characteristic arrogance, managed to hand over the Russian gas export market to the US and, believe me, the Americans make plenty of money at 58p a therm, as indeed Russia would have done. I doubt the Americans can believe their luck.
So what can we expect for the rest of the year? The gas price is currently at a three and half year low and in February which is definitely not when you would expect gas prices to be so low. This means the price is likely to be very sensitive to any massive cold weather systems that blow up in the US or Europe so we can expect a shift higher at some point in the next few weeks. There’s also a strong sense that this is a market looking for a bottom which it must hit soon.
However, the longer-term outlook for this year is much more positive. Putin’s gamble has led to oversupply and the price has reacted accordingly. At the same time, we are heading into spring and summer in the Northern Hemisphere when we would expect natural gas demand to be at its lowest. This means that major energy suppliers will be looking to hedge their production for next winter at bargain basement levels and gas producers will be nervous that mild weather and the supply glut continues perpetually. This means lower bills and lower inflation: Cornwall Insights reported last week that they are expecting the energy price cap to fall in April from £1,928 to £1,635 – a drop of 15 per cent.
There are vanishingly few reasons to be thankful for Vladimir Putin but lower household energy bills really is one of them.
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