Europe is at risk of transitioning from an oil shock to a natural gas shock, with significant implications for inflation and monetary policy, according to RBC European Macro Strategy. European gas storage levels are around 60%, significantly below the historical August average of 75%. This, coupled with weaker liquefied natural gas (LNG) imports and heightened competition from Asia for available cargoes, suggests a growing vulnerability. Unlike oil, natural gas is central to Europe's energy system, influencing electricity prices, industrial production, and household utility costs, making its price fluctuations a broader inflation driver.
European gas prices have already surged by over 130% since the beginning of 2026, with the Dutch TTF futures reaching above €65 per megawatt-hour, the highest since March. Oxford Economics anticipates raising its European gas price forecast, possibly to an average near €60/MWh for Q4 2026 and Q1 2027. This rally is not just an energy story but an inflation concern for the European Central Bank (ECB), as persistent high prices will eventually be passed on to consumers. Oxford Economics estimates that under current wholesale gas pricing, Eurozone headline inflation could reach approximately 3.5% in the second half of 2026, compared to just over 3% in its baseline.
Goldman Sachs warns that European gas prices need to exceed €100 per megawatt-hour in December to ensure adequate rebuilding of stockpiles for winter, as current injection rates are too slow, leaving storage at an estimated 51% full by month-end in Northwest Europe. The ongoing Middle East conflict has constrained LNG flows through the Strait of Hormuz, intensifying competition for remaining cargoes and delaying an expected global supply glut by at least two years. Europe's gas storage was only 59% full as of August 10, the lowest seasonal level since 2009. The EU's 90% storage target by winter appears out of reach, with Montel forecasting storage levels between 69% and 84% by November 1.
This situation could compel Europe to pay even higher prices during colder months to meet demand, especially as it competes with Asia for LNG cargoes. Italy is identified as the most exposed large European economy due to its fast price transmission and heavy reliance on gas. While a gas-driven inflation surprise might not trigger a return to monetary tightening by the ECB, it is highly likely to delay future easing. The ECB's June projections already factored in elevated headline inflation due to energy prices, expecting 3.4% in Q3 and Q4 2026, making a colder winter a difficult scenario of weaker purchasing power and higher interest rates.
