European Stocks Face Gas Price Shocks Amid Geopolitical Tensions

European stocks are facing growing risks from soaring natural gas prices, but the region's equity market and economy appear less vulnerable than they were during the 2022 energy crisis, according to Citi strategists.

Natural gas prices have surged above €80 per megawatt-hour, their highest level since late 2022, amid escalating geopolitical tensions. Historically, cyclical and energy-intensive sectors such as autos, travel and leisure, chemicals, and banks have underperformed during sharp increases in gas prices.

However, the current situation differs from the 2022 energy shock, when Europe's loss of Russian gas supplies drove prices sharply higher and raised concerns over shortages and industrial production. This time around, gas storage levels are higher than many investors assume, providing a larger cushion against further supply disruptions.

Commodity strategists expect natural gas prices to retreat toward the mid-€50s per megawatt-hour by year-end across various scenarios involving the reopening of the Strait of Hormuz and winter weather conditions. A sustained move higher instead would increase risks to Europe's economic and corporate earnings trends, particularly for companies with high energy requirements or greater sensitivity to consumer demand.

Despite this, the broader outlook for European equities remains constructive through mid-2027, supported by solid earnings-per-share growth. The latest surge in gas prices has not changed that view, though further increases could put greater pressure on cyclical sectors and weaken the improving macroeconomic backdrop.