Why are Europe’s gas prices falling?

Is Europe’s chilly winter destined to become another Millennium bug – a much-feared disaster that never transpires? Only a few weeks ago wholesale gas prices were surging, leading to predictions of blackouts, rationing and people unable to heat their homes. Throughout August, analysts produced forecasts (extrapolated from wholesale gas prices) which showed eye-watering energy prices throughout winter and spring. Governments reacted by hurriedly announcing extremely expensive schemes to cap prices for consumers. This, in part, contributed to the rapid fall of Liz Truss as markets panicked that her government would be unable to fund her £100 billion plus energy price guarantee.

Yet, since then, wholesale gas prices have plummeted. Yesterday, they fell below 100 Euros per MWh for the first time since June – less than a third of their peak in August. It is possible that the government’s energy price guarantee – which remains in place until April, when the Chancellor suggests it may be replaced with a less-generous scheme – will end up costing taxpayers nothing at all.

So, what is going on? Oil and gas prices have always been very sensitive to minor changes in the balance between supply and demand – and that is exactly what is happening now.