Natural gas and crude oil prices have surged sharply in January, driven by rising demand and new U.S. sanctions on Russia. The increase in energy prices poses significant risks to the eurozone’s inflation outlook and raises concerns about a potential stagflationary scenario for the region.
Benchmark natural gas futures at NYMEX spiked to $4.37 per million British thermal units (MMBtu), the highest level since December 2022, before retreating slightly on Monday. Crude oil futures, including WTI and Brent, also rose to their highest levels since August 2024, with WTI up by 17% and Brent climbing 14% since early December. The price hike in natural gas is largely attributed to soaring demand due to cold weather in the northern hemisphere, while the surge in crude oil prices follows new U.S. sanctions on Russian oil exports.
Natural gas prices have more than doubled since October 2024, rising from under $2 per MMBtu to just under $4. According to the U.S. Energy Information Administration, natural gas futures for delivery at the Title Transfer Facility (TTF) in the Netherlands averaged $14.55 per MMBtu for the week ending January 8, a 27% increase compared to the same period last year. The surge in oil prices also stems from the continued decline in U.S. oil inventories, which dropped for the seventh consecutive week by January 5, alongside sanctions imposed on Russian oil producers like Gazprom Neft and Surgutneftegaz.
The rising energy prices come at a precarious time for the eurozone, which is already facing economic challenges amid political uncertainties. Experts warn that higher energy costs could exacerbate inflationary pressures and hinder economic growth, pushing the region toward stagflation. Stagflation refers to an economy experiencing high inflation, stagnant growth, and rising unemployment—an increasingly plausible scenario for the eurozone.
Kyle Rodda, a senior market analyst at Compital.com, said, “If energy prices continue to rise, there is a risk of a stagflationary mix in Europe, which is struggling with energy policy and weak growth.” This mirrors the challenges the eurozone faced in 2022 when Russia’s invasion of Ukraine sent energy prices soaring. The European Central Bank (ECB) will likely be tasked with balancing inflation and economic growth, a difficult feat as energy prices remain volatile.
In November 2024, S&P Global projected eurozone GDP growth of just 0.8% in 2024 and 1.2% in 2025, contingent on falling energy prices and ECB rate cuts. However, a resurgence in energy prices could undermine these projections.
The situation may also be influenced by the incoming U.S. administration. President-elect Donald Trump has expressed intentions to broker a truce between Russia and Ukraine, potentially leading to a reversal of some sanctions on Russian energy exports. If such negotiations succeed, it could have a significant impact on global energy markets, though experts believe the chances of this happening remain low.
