Save for later Print Download Share LinkedIn Twitter "Frantic and panicky." That's how Vitol chief Russell Hardy described gas and LNG markets this past week. It's certainly true in Europe, where prices have skyrocketed and governments have warned that the situation could spark a popular backlash against ambitious climate and energy transition policies. In this article, Energy Intelligence takes a look at what's been going on and what might happen next.Why Are European Gas Prices So high?Soaring natural gas and LNG prices reflect extremely tight global markets, in which demand is outpacing supply. This time last year, European gas prices were below $4 per million Btu. But they have recently been closer to $25/MMBtu — the equivalent of oil priced at over $150 per barrel. Several factors are at play. These include LNG plant outages; Russian gas giant Gazprom's unwillingness or inability to supply more gas than it is contractually obliged to deliver; lower Norwegian gas output; declining production in Europe; and a post-pandemic rebound in Asian LNG demand.Is There Any Price Relief in Sight?No. European storage volumes are much lower than normal after a cold 2020-21 winter and Asian LNG demand remains strong heading into the upcoming winter. Tightness could perhaps ease if Gazprom's controversial Nord Stream 2 pipeline were to start up soon, but that looks unlikely. EU gas storage facilities have recently been around 72% full, versus more than 94% at the same time last year. In Germany, Europe's biggest gas market, storage volumes are only at about 65% of capacity. That's nearly 30 percentage points below the 2009-20 average. Winter weather will be key. Assuming normal seasonal temperatures, HSBC analysts suggest European storage volumes would exit winter in the low 20% range, which would be some 15 percentage points below the average for recent years. However, they warn that a repeat of last year's cold winter could push storage volumes to dangerously low levels, raising the risk of price spikes and/or shortages in some countries.Where Does Europe Get Its Gas From?Imports meet more than half of EU consumption. Of the 141.8 billion cubic meters consumed in the first quarter of 2021 (the latest available figures), imports from outside the bloc totaled 78.5 Bcm, European Commission figures show. The biggest importers were Germany, Italy, France, Spain and Belgium. Russia was the largest outside supplier (45%), followed by Norway (23%) and Algeria (12%). LNG accounted for just under 20% — eight percentage points less than a year earlier — mainly because LNG cargoes have been drawn to Asia where prices are even higher. The UK — no longer part of the EU — also imports more than half its gas, but its storage is equivalent to less than 2% of annual demand, versus an EU average of 25%.Why Have Power Prices Skyrocketed, Too?European gas, coal, carbon and electricity prices are closely related. Demand for gas has risen as power output from wind farms has dropped. That has helped push up gas prices, making coal-fired generation more competitive and prompting some fuel switching. Because coal emits twice as much carbon as gas when burned, power generation companies have to buy more EU carbon permits, further inflating already-high carbon prices. As a result of this, power has become more expensive. How are Governments Reacting?Some are providing emergency aid to households and utilities. Countries that rely heavily on imported gas, such as Italy, Spain and France, have been hit particularly hard. They have introduced measures that include cutting prices, raising taxes on energy company profits or introducing subsidies to shield households from soaring energy bills. Spain has reportedly proposed using the EU's combined purchasing power to buy gas that would be used as a strategic stockpile for emergency use. EU leaders may discuss the plan next month.Will European Climate Policy Be Affected?The crisis has thrust EU energy transition targets into the spotlight. Poland blames EU climate policy for its high power prices. Spain and France have warned that there could be a popular revolt against energy transition policies if consumers conclude they will drive up their monthly bills. EU Climate Chief Frans Timmermans is unapologetic, insisting that Brussels is not to blame for the current high prices.He argues that if the commission's "green deal" policies had been introduced five years ago, "we would not be in this position, because then we would have less dependency on fossil fuels and on natural gas." "So instead of being paralyzed or slowing things down because of the price hike ... we should speed things up in the transition to renewable energy," he said.