EU gas unity tested as Italy drops regional benchmark from bills

The European Union is facing its worst energy crisis in decades and there are already signs that its members aren’t responding with unity. 

Prices and exposure to Russian supply disruption differ from country to country, and the gap may widen after Italy announced changes to how it calculates consumer bills. From October, they will no longer be based on the EU benchmark, which trades at the Title Transfer Facility in the Netherlands, and will instead be linked to Italian gas contracts, the energy regulator, known as ARERA, said.

The surprising move may show an expectation -- or at least a hope -- that the price of the two gas contracts can decouple, analysts at Citigroup Inc. said in a note. Rapid gas stockpiling in Italy last month, and the potential for further high injections into storage in August, could result in a brief gas glut in the country. That would “materially improve the sentiment on gas winter outlook in Italy and thus create volatility in Italian gas prices,” they wrote. 

Europe’s solidarity has been challenged this year as Russia slashed gas supplies to the continent in an apparent retaliation for international sanctions imposed over Moscow’s invasion of Ukraine. The benchmark gas contract, traded in Amsterdam, has more than doubled so far this year, reflecting overall risks for the continent this winter. 

Some EU members, such as Italy, have more alternative sources to Russia, including liquefied natural gas and flows from Algeria. Other countries, especially in the east, are more reliant on pipeline supplies from Russia and lack interconnectors to key LNG import terminals in the west. 

Hungary has already said that it would ban energy exports in most cases as part of its “energy state of emergency,” while also planning to secure additional volumes of gas from Russia. More countries could close their borders to outgoing gas flows if the supply situation deteriorates. 

For Italy, the winter gas risk has declined, Citigroup said. The country’s gas-storage level of about 73% is still below the five-year average, according to data from Gas Infrastructure Europe. But decreasing gas usage, coupled with higher purchases of non-Russian gas, could help Italy get through the winter. 

“We believe this target is achievable for Italy under normal weather conditions,” Citigroup said.