European Stocks Face Rising Risks from Surging Natural Gas Prices

European stocks face growing risks due to surging natural gas prices, but their vulnerability appears less severe than during the 2022 energy crisis, according to Citi strategists.

Natural gas prices have climbed above €80 per megawatt-hour for the first time since late 2022 amid escalating geopolitical tensions.

Past gas-price shocks suggest that cyclical and energy-intensive sectors like autos, travel, leisure, chemicals, and industrials are most at risk during sharp increases in gas prices. These sectors have historically underperformed during such periods.

However, commodity-related stocks, defensive sectors, and selected growth industries tend to perform better during gas-price shocks, indicating a mixed impact across European equities.

The current situation differs from the 2022 energy crisis, when Europe's loss of Russian gas supplies drove prices sharply higher, raising concerns over shortages and industrial production. The region's economy and equity market now appear less sensitive to rising gas costs due to higher gas storage levels providing a larger cushion against supply disruptions.

Commodity strategists expect natural gas prices to retreat towards the mid-€50s per megawatt-hour by year-end, assuming various scenarios involving the reopening of the Strait of Hormuz and winter weather conditions. However, sustained price increases could put greater pressure on cyclical sectors and weaken the improving macroeconomic backdrop.