How vulnerable are European stocks to natural gas price shocks?

Investing.com -- European stocks face growing risks if natural gas prices continue to climb, but the region’s equity market and economy appear less vulnerable than during the 2022 energy crisis, Citi strategists said.

European natural gas prices have surged above €80 per megawatt-hour, reaching their highest level since late 2022 amid escalating geopolitical tensions.

Past gas-price shocks suggest cyclical and energy-intensive sectors face the greatest pressure. Autos, travel and leisure, chemicals and banks have historically underperformed during sharp increases in gas prices.

Commodity-related stocks, defensive sectors and selected growth industries have tended to fare better during such periods, leaving the impact across European equities highly uneven.

The current situation also 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.

The region’s economy and equity market now appear less sensitive to rising gas costs. Gas storage levels are also higher than many investors assume, providing a larger cushion against further supply disruptions.

The outlook for gas itself could limit the threat to stocks. Commodity strategists expect prices to retreat toward the mid-€50s per megawatt-hour by year-end across a range of scenarios involving the reopening of the Strait of Hormuz and winter weather conditions.

A sustained move higher instead would increase risks to the recent improvement in Europe’s economic and corporate earnings trends, particularly for companies with high energy requirements or greater sensitivity to consumer demand.

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.