Littleton, Colorado — After scaling two-year highs in early February, Europe’s benchmark gas prices have been on a down-slope that may now steepen as the traditionally weakest period for gas-fired power demand approaches.
The early-year strength in gas prices was driven largely by winter heating demand and below-normal wind power generation that forced utilities to balance system needs with elevated gas-fired generation.
Europe’s gas-fired electricity production climbed to the highest since 2021 over the first two months of 2025, according to energy think tank Ember, and remains above year-earlier levels in key markets so far in March, LSEG data shows.
However, gas use for power generation tends to slump sharply from the end of March, as heating demand wanes and combined power supplies from solar and wind farms near their annual peak during the so-called spring shoulder season.
If that pattern unfolds again in 2025, Europe’s gas prices could gain fresh downward momentum even though they have already fallen by more than a quarter from their 2025 peak.
DOWNTURN
Europe’s natural gas-fired generation has historically plunged during the April to June quarter from the opening quarter of the year as heating demand subsides.
From 2015 through 2024, the April to June quarter was the lowest period of the year for gas-fired electricity production, dropping by an average of 25% from the January to March quarter.
In 2024, the second quarter gas generation total was 31% less than the first quarter, and an outsized decline in gas use could be on the cards again in 2025 if mild conditions hit the brakes on heating demand from the end of this month.
The latest weather forecasts from LSEG indicate that above-normal temperatures are expected across most of mainland Europe from March 20 onwards, which could put a chill on regional heating demand from as soon as this week.
INDUSTRIAL WOES
Regional gas demand is also impacted by industrial applications, with chemical plants and cement producers among the top European gas consumers outside the power sector.
However, enduring economic malaise has stifled much industrial activity across Europe, with output of chemicals, fertilizers, steel and plastics all holding near multi-year lows in Germany at the start of the year.
In Italy, which is Europe’s second-largest industrial gas user, industrial activity expanded in January from the month before, but remained below the year-earlier total due to lingering weakness in its manufacturing sector.
PRICE PROBLEMS
A key cause of Europe’s industrial headwinds are the region’s power prices, which have started 2025 sharply above year-earlier levels.
Wholesale power prices in Germany – Europe’s largest industrial product manufacturer – have averaged 127 euros per megawatt hour (MWh) during the first three months of 2025, according to LSEG.
That average is 49% more than the average for 2024 as a whole, and means that major energy consumers continue to face severe cost challenges this year.
Power prices in the Netherlands, Italy, France and Poland are also sharply above year-before levels.
A key driver of that power cost inflation has been the rise in regional natural gas prices, as gas accounts for over a quarter of Europe’s electricity supplies.
If gas prices start to trend lower as power use contracts, regional power costs could follow suit and create a little breathing room for power consumers.
However, industrial gas users will still likely find themselves in competition with gas storage operators, who are on the hook to replenish regional stockpiles following the steep draw on Europe’s gas inventories so far this year.
Typically, gas storage firms start to rebuild stockpiles in earnest from late spring, so that their buying flows are spread out across the lowest consumption months and so stocks are filled again by winter.
This year, gas buyers may need at least 100 more cargos than in recent years to make up for the steep drop in inventories so far in 2025, which could drag replenishment purchases earlier in the year.
However, European nations are currently discussing making the region’s gas storage goals more flexible, following disputes over binding targets that threatened to run up the cost of gas stockpiles for the region.
The current requirement is for regional tanks to be 90% of capacity by November 1, but member states are now considering widening that time frame from October 1 to December 1.
Such a wider fill target would give tank operators more scope to time their purchases, and could result in reduced orders from the storage sector over the coming months.
And if that slower pace of storage orders overlaps with reduced gas demand from the power sector, regional gas prices could slide significantly from current levels before the restocking orders likely shore up the market in the summer.
The opinions expressed here are those of the author, a market analyst for Reuters.
By Gavin Maguire; Editing by Christopher Cushing – Reuters
