The war in Ukraine is raging, Russian natural gas exports to Europe are dwindling and the winter heating season is approaching. That would seem like a recipe for higher prices, yet the cost of the fuel, which is vital for heating homes and for powering electricity plants and industry, has been plummeting.
The benchmark European price of natural gas this week fell to a level that is more than 70 percent below its record high in August. One of the main reasons for the plunge in prices is that Europe, at least for now, has all the natural gas it needs.
That is because over the summer, Europe went on a global buying spree as Russia, its longtime main supplier, reduced its flow of natural gas.
Across the continent, governments and businesses have aggressively replenished how much gas they are holding in storage. At the urging of European Union officials and at a high cost, energy companies and governments have filled underground caverns and other facilities to more than 90 percent of capacity, compared with less than 80 percent year ago.
Companies that sell natural gas, driven by the high prices, flooded the European market. Special ships with huge amounts of liquefied natural gas, or L.N.G., raced to Europe from the United States, Qatar and other countries (including Russia) that produce large amounts of gas.
The rush to sell to Europe was so great that vessels are now loitering off the coast waiting for slots at crowded terminals to unload their cargoes. One illustration of the glut: In recent days, at least one L.N.G. carrier heading from Algeria to Europe appears to have diverted to Asia in search of a better price, according to Laura Page, an analyst at Kpler, a research firm.
Europe’s healthy stocks of gas represent a substantial buffer against further cutoffs of Russian supplies or other shocks.
“You’ve got storage levels that people could only dream of a few months ago,” said Massimo Di Odoardo, vice president for gas research at Wood Mackenzie, a consulting firm.
At the same time, the demand for natural gas, which serves as a major source of power to generate the electricity that Europe consumes, has fallen sharply, another factor pulling prices down. A warmer-than-usual start to autumn in many parts of Europe has meant that residents have not needed to use much, if any, heat.
But analysts warn that the recent drop in gas prices could be fleeting — natural gas that is set to be delivered to Europe this winter is already being sold in futures markets at a considerable markup to the current price. The unusually large swings in prices that have come as Russia constricted gas supplies in recent months are likely to continue.
Gas prices in Europe remain historically elevated, even after the recent decline, trading at twice the level set at this time a year ago and even higher versus long-term averages.
As a result, many energy-hungry businesses like aluminum smelters, steel mills and fertilizer plants have at least temporarily shut down. In Italy, a large gas consumer, demand for the fuel in August and September was down about 10 percent compared with the same months a year ago.
The threat of regulation has also weighed on markets, analysts say. The European Union’s recent agreement to impose a ceiling on gas prices, while still lacking in detail, is probably lowering prices, analysts say.
But in the short run, lower prices may cause their own sort of pain, according to Henning Gloystein, a director at Eurasia Group, a political risk firm.
European utilities, which are in the business of buying gas to generate electricity and sell to customers, have already taken losses because of the cutoff of Russian gas and may have ordered expensive L.N.G. to compensate for the lost supplies. Now, because of lower-than-expected demand, they could be stuck with the fuel. “That may force some utilities to sell their expensive cargoes much more cheaply elsewhere, perhaps causing big fiscal damage,” Mr. Gloystein said.
Lower gas prices could also weaken the incentive for developing more expensive clean fuels like hydrogen. What’s more, it could act as a brake on re-engineering commodities markets to break the link between electric power and natural gas, although some analysts say that is inevitable.
“The ball is rolling and I believe that there is widespread acceptance of the need for change,” said Martin Young, a London-based analyst at Investec, an investment bank.
And experts say it is too soon to get comfortable about the prospects for cheaper gas, since markets are reacting to circumstances that may not last. Futures prices for natural gas for delivery in January and February of 2023 are trading more than 40 percent higher than for November.
Prices might be tested if Russia cut off the remaining flows of gas to Europe through Ukraine or if there was sabotage of energy infrastructure, like the unexplained ruptures in the Nord Stream pipelines that run from Russia to Germany.
Then there is the weather. “The test will come when we have the first cold snap and storage starts to empty,” said Jonathan Stern, the founder of the gas program at the Oxford Institute for Energy Studies. “We will see how the market reacts to that.”