- In late September, the price of natural gas in Europe reached record levels.
- Stocks were low just before winter and supply was tighter than usual.
- The warning signs existed before the problem was evident: it pays to review energy contracts in time.
In late September 2021, the price of natural gas in Europe reached record levels. Stocks were low just before winter, the period of highest consumption for heating, and supply was tighter than usual. When the safety margin shrinks, prices react strongly, and that is what happened in the final weeks of the month. Gas markets are sensitive to any news on supply, temperatures or storage.
For many citizens, the news went almost unnoticed, overshadowed by other events. Yet gas is a key piece of the European energy system: it is used for heating, for industry and for generating electricity. Its higher price does not stay within the sector but is passed on to electricity bills, manufacturing costs and the final prices of many products. Industries that use it as a raw material or a source of heat are especially sensitive.
A tight supply
The price of gas is formed in international markets where supply and demand are constantly adjusting. When available supply is scarcer, or when stored reserves are low, a small rise in demand is enough to push prices up. In late September both circumstances were present at once, and with winter around the corner the margin was minimal.
Low stocks ahead of winter are a source of tension in themselves. Buyers know they will need more gas in the cold months and that, if storage is not full, they will have to secure supply in a tight market. That anticipation pushes prices up even before the cold arrives, and leaves less room to react if something unexpected happens. The closer winter gets, the less time there is to correct the situation.
A crisis already under way
The energy crisis that would erupt in 2022 was already under way. Gas influences the price of electricity, industrial costs and household bills. Although few then imagined its scale, the symptoms were visible to anyone paying attention to the market.
The warning signs existed before the problem was evident. It is a frequent feature of crises: the signs appear before their effects show up in the real economy, and those who read them in time have more options. For a company with significant energy consumption, or a family with gas heating, those autumn months were a good time to review their position. Those who did so could compare offers and negotiate more calmly than those who waited for the cold months.
Reviewing contracts in time
Companies that reviewed their supply contracts at that point were better prepared for what came next. It is worth knowing what type of contract one has, at what price and until when, which clauses allow it to be revised and what options exist for fixing prices or improving efficiency. It also helps to know which part of consumption is essential and which can be adjusted. Doing so before costs become critical gives more room to manoeuvre.
A useful review includes comparing offers, assessing whether it makes sense to fix prices for a period and studying measures that reduce consumption, such as improvements in insulation or efficiency. Such measures require an initial outlay, and it is worth assessing with figures how long it takes to recover. For households, it amounts to reviewing the supply terms and the heating arrangements. Reviewing energy contracts in calm times is a prudent investment.
Energy contracts are better negotiated before the cold bites.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
