Time to end the catastrophism – Putin’s gas weapon has been spiked

European and British gas prices have fallen by almost 80pc since the panic buying in August. The benchmark TTF contract dropped below €70 per megawatt hour last week and is back to the levels just before the invasion of Ukraine.

Futures prices have fallen pari passu for next winter as well, and for the winter after that. The market is no longer pricing in a protracted supply crisis caused by the cut-off in Russian gas. The world has adapted remarkably well to Vladimir Putin’s energy war.

Remember those Gothic predictions by energy consultants, outbidding each other with warnings that average household energy bills in the UK would rise as high as £7,700 by April unless there was a price cap?

The claims were reported by the British and foreign media almost as established facts rather than a snapshot of the gas futures curve taken at a moment of extreme market stress, and subject to global and geopolitical variables that no consultant could possibly predict.

These claims were never more than a tail-risk. Analysts have since been slashing their forecasts. The April figure is likely to be less than half of earlier fears. The new consensus view is that it will then drop to between £2,700 and £2,800, which is below the £3,000 Government’s expected cap from April onwards. “The energy price guarantee is getting cheaper by the day,” said Elizabeth Martins from HSBC.

Last year’s episode of breathless extrapolation has had serious consequences. It alarmed millions of people and fed the national mood of simmering discontent. It bounced the Truss-Kwarteng government into an indiscriminate and over-generous energy subsidy for rich and poor alike, contributing to the fiscal debacle that unfolded in September.

What is less understood is that it also set the assumptions used by the Office for Budget Responsibility in its economic forecasts and therefore shaped the parameters of fiscal policy. The OBR pencilled in a gas price through 2023 and early 2024 that is more than double the implied cost now suggested by the futures market over the same period.

There are lag effects in the global market for liquefied natural gas (LNG) and we do not know how much was bought in advance at nosebleed prices. But original estimates that energy support would cost the Treasury £150bn in total were scandalously wrong.

In a sense, the alarmist saga over the energy price cap has led the Sunak-Hunt Government to pursue needlessly harsh austerity into the teeth of recession. Is that what many of those shouting loudest last August ever expected?

The weather has been part of the better story. It has so far been the fourth mildest winter in Europe since 1970. It is also mild in Asia and that matters enormously because China and Japan are the world’s top two importers of LNG, competing directly with Europe for supply.

It is mild in the US too after the extreme polar vortex two weeks ago. Goldman Sachs says the warm snap across the northern hemisphere in January has twice the gas market impact of the December deep freeze that preceded it.

But it is not just the weather. Europe has proved able to slash gas demand without setting off mass social protest or triggering a deep recession, even if some metal smelters will never reopen, and some forms of chemical production may migrate permanently to the US or the Middle East.

Martijn Rats from Morgan Stanley says industrial gas use in the EU core was down 27pc in December. Total gas demand across the region is running at 19pc below the five-year average.

Wind power has come roaring back: call it a reverse Dunkelflaute. Wind in the UK reached a fresh record of 20.9 gigawatts on December 30, and it alone has generated 49pc of this country’s total electricity over the last week. Zero-carbon power briefly hit 88pc of the UK’s grid supply last Wednesday, which displaces gas megawatt for megawatt.

The result is that Europe has been able to refill its gas storage at times even in mid-winter. Levels are at 91pc in Germany, 89pc in Belgium, 82pc in France, and 81pc in Italy. Mr Rats estimates that storage levels could still be above 50pc at the end of the winter season in late March, compared to 24pc last year and 32pc in a typical year.

If so, Morgan Stanley thinks Europe may no longer need any Russian supply to refill inventories before the winter of 2023/2024. It can obtain the extra 37 bcm (billion cubic metres) required from everywhere else: the US, Qatar, North Africa, Azerbaijan, and so on. Vladimir Putin’s gas weapon has been spiked.

Another dimension is often overlooked. The destruction of gas demand has been spread across the world, causing changes of behaviour in China, Japan, South Asia and Latin America, and all helping to restore balance with less pain than many feared.

It is a mixture of energy substitution and the price mechanism working via the fungible world market for LNG. Japan has fired up nuclear plants mothballed since Fukushima. China last year increased coal mine output by a fifth above pre-pandemic levels.

Global gas consumption is 4,100 bcm. The loss from Russia is roughly 130 bcm. It turns out that this gap can be plugged more easily than supposed with rising LNG supply.

The emergence of the US as a global gas superpower has transformed the strategic balance of power. It would have been a different story if Putin had struck a few years earlier, when cheap US shale gas was mostly trapped inside the country for lack of export terminals.

HSBC says the British Government has some fiscal room to play with the energy cap. It could pocket the lower costs or it could keep the household cap at £2,500 from April rather than lifting it to £3,000 as planned. The bank calculates that this would cut inflation by a further percentage point to 4.5pc by December, ceteris paribus.

I am not normally in favour of manipulating price signals but there is some merit on this occasion. It would feed a sense that inflation is plummeting, help break any incipient price-wage spiral and calm labour unrest.

Gas prices are still 3.5 times higher than they were over the preceding decade so we are not out of the woods yet. The obvious imperative is to roll out much cheaper wind and solar as fast as possible, along with a green hydrogen infrastructure large enough to provide back-up storage in salt caverns.

It is why the Government should grasp the nettle on energy efficiency and insulation in buildings, one of the greatest Tory failures over the last 12 years. David Cameron’s alleged instruction to “cut out all the green crap” has cost us dear.

The global gas market may yet come back to bite as China reopens, central banks stop tightening, and the world rebounds from the current light recession. Putin may play the oil card against the West, which would push up gas prices again through fuel switching in power plants.

But this is conjecture. The gas futures market is not telling us that. Putin’s capacity for energy blackmail is greatly devalued, and he is running out of missiles to murder Ukrainians. So can we please dial down the wearisome catastrophism.

This article is an extract from The Telegraph’s Economic Intelligence newsletter. Sign up here to get exclusive insight from two of the UK’s leading economic commentators – Ambrose Evans-Pritchard and Jeremy Warner – delivered direct to your inbox every Tuesday.