The euro boosted by the sharp drop in natural gas prices


Archive image of Ursula von der Leyen. Photographer: Etienne Ansotte. © European Union, 2020. Source: EC – Audiovisual service.

Falling natural gas prices should support euro exchange rates at the end of August.

Gas prices in Europe and the UK for future deliveries are down around 20% at the time of writing, helping the euro back above parity against the dollar and extending a string of gains several weeks against the pound.

“The pullback in European natural gas futures after the Commission promised emergency intervention and electricity market reform was a breath of fresh air for the euro,” said Marios Hadjikyriacos. , senior investment analyst at XM.com.

Gas prices are falling due to a combination of two factors: 1) Data shows that European storage levels are rising rapidly, reducing the chances that rationing will be necessary. 2) European leaders are seeking to reform the tariff structure of the electricity market, which should bring prices down.

1) Storage Success

Gas Infrastructure Europe reports that Europe on Sunday met the EU’s target of restoring storage to 80% capacity by November.

“These gas tanks are filled at absolute peak prices, normally one hopes to have filled them when the price is very low. any price,” says Faisal Islam, BBC economics editor.

This portends a decline in physical demand in the future as gas companies may choose to be more price sensitive when meeting remaining storage needs.

Gas prices in Europe

Above: The benchmark gas price in the EU has fallen sharply. Image reproduced with the kind permission of @ChrisGiles_

Above: The UK benchmark also fell amid weaker demand in Europe. Image reproduced with the kind permission of @ChrisGiles_


2) Reform of energy prices

European Union Commission President Ursula von der Leyen said on Monday that the EU intends to introduce a significant reform of European energy markets. The UK has already said it is also considering taking similar action.

The current market structure means that even electricity that is relatively cheap to produce, such as wind and solar power, is expensive to buy if gas prices are high, driving up costs for utilities public and households.

It is hoped that the final price of wholesale electricity can be dissociated from the price of its most expensive component, in this case that generated from gas.

It is this link that the governments of the United Kingdom and Europe want to break, possibly by creating separate markets for energy produced by wind and solar or gas and coal.



von der Leyen said the deepening energy crisis besetting Europe has laid bare the “limits” of the electricity market and requires “urgent intervention”.

It was a torrid month for the Eurozone and its single currency, with gas and electricity prices hitting new records amid tighter supply from Russia and rising demand as countries were rushing to fill storage facilities ahead of a harsh winter.

“The spike in electricity prices now exposes, for different reasons, the limits of the current design of our electricity market,” von der Leyen said Monday at the Bled Strategy Forum in Slovenia.

“We, the Commission, are currently working on emergency intervention and structural reform of the electricity market. We need a new electricity market model that really works and brings us back into balance” , she added.

If investors sense that the worst of the European energy crisis is near, they could start supporting the euro again.

We have noted in regular reports that the Euro has been particularly prone to weakness in the face of soaring energy prices in the Eurozone, given the energy-intensive nature of the German economy.

The EU also sources more gas from Russia than, for example, the UK, which depends on its own North Sea reserves and imports from Norway.

Falling gas prices are therefore more likely to have a positive impact on the euro than on the pound: the pound/euro exchange rate fell below 1.17 to 1.1688 at the time of writing, its most low level since July 21.

The pound has now fallen against the euro for four of the past five weeks (last week the pair ended flat).

The Euro is gaining strength against the Pound and a test of 1.16 and June lows at 1.1462 are now likely.

The euro-to-dollar exchange rate is meanwhile up a third of a percent at 1.0041, with recent price action confirming that the market is not entirely comfortable with lower levels. at 1.0.

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