European gas prices have surged 130% in 2026, with Dutch TTF futures climbing to over €65 per megawatt-hour on Thursday, the highest level since March. Oxford Economics warns that the worst may still be ahead, potentially raising its European gas price forecast in September to an average close to €60/MWh during the fourth quarter of 2026 and first quarter of 2027.
The rally comes as Europe heads toward winter with inventories depleted and little room for another supply shock. European gas storage was only around 57% full at the beginning of August. Gas Infrastructure Europe data shows the level at 57.1% on August 1, the lowest reading for that point in the year in the historical series. The EU's rules still target 90% storage, though countries now have more flexibility over when they reach it. The target can be met between October 1 and December 1, and Brussels has encouraged countries to consider using that flexibility to reduce the target to 80% when market conditions make filling more difficult.
The Storage Gamble
Oxford Economics said several adverse supply-side risks have materialised and gas storage levels are historically low ahead of the heating season. Europe has cut gas consumption by roughly 15% to 20% compared with 2021, helped by lower industrial use, expanded renewables and heat pumps replacing some gas-fired heating. Global LNG supply has increased and Europe has more import terminals, making an outright physical shortage far less likely than during the 2021-2022 crisis.
But lower consumption hasn't removed Europe's biggest vulnerability. The relationship between temperature and gas demand remains almost perfect. Last winter, when temperatures briefly fell below the long-term average, Europe's gas savings versus pre-2021 levels narrowed to only 5% to 10%. Storage remains the buffer between a normal winter and a supply shock. When inventories are high, traders can absorb a cold snap without bidding aggressively for new cargoes. When inventories are low, every colder-than-expected week becomes a race for supply.
The Inflation Problem
The gas rally is also an inflation story and potentially a problem for the European Central Bank. Oxford Economics estimates that eurozone headline inflation could run closer to 3.5% in the second half of 2026 under current wholesale gas pricing, versus just above 3% in its latest baseline. The ECB has already raised rates in response to an energy-driven inflation shock, and markets widely expect another 25-basis-point hike in September. The ECB's own June projections showed headline inflation remaining elevated because of higher energy prices, with inflation expected to reach 3.4% in the third and fourth quarters of 2026.
The impact will vary sharply across Europe. Germany and Austria tend to have longer fixed-price contracts, slowing transmission. France, Italy and Spain respond faster. In the Netherlands, the pass-through is almost immediate. Italy stands out because it combines relatively fast price transmission with heavy reliance on gas. Oxford Economics identifies it as the most exposed large European economy to a gas price shock.
Beyond Gas
The pressure isn't confined to gas. Diesel refining margins in Europe, Asia and the U.S. have surged to unprecedented levels amid the Iran war energy crisis, with European diesel cracks above $75 a barrel. Buffers from pre-war stockpiles are largely depleted, adding to the strain across energy markets. Gas prices remain well below the €350/MWh peak reached during the 2022 energy crisis triggered by Russia's invasion of Ukraine, but the combination of high prices, low storage and geopolitical disruption has left Europe vulnerable to a costly winter.
Why This Matters:
Europe's energy vulnerability exposes the cost of political choices made over the past decade. The combination of low storage, high prices, and geopolitical instability threatens household budgets and industrial competitiveness heading into winter. The ECB faces a renewed inflation challenge driven by energy costs, potentially forcing further rate hikes that will slow growth. Italy's exposure is particularly acute, combining fast price transmission with heavy gas reliance. The flexibility Brussels has granted on storage targets reflects the reality that market conditions have made the 90% target unaffordable for some member states. But flexibility doesn't create gas. If temperatures fall below average this winter, Europe will be bidding against itself and Asia for every available cargo, with households and businesses paying the price. The diesel margin surge compounds the problem, hitting transport costs and industrial input prices simultaneously.