Natural gas and crude oil prices have surged recently amid rising demands and the US's wider sanctions on Russia. Elevated energy prices could jeopardize the eurozone's inflation outlook and push the regional economy into stagflation.

Both crude oil and natural gas prices saw a sharp increase in January amid increasing energy demands and new US sanctions on Russia, Euronews reported on Tuesday.

Benchmark natural gas futures at NYMEX rose to Dollar 4.37 (Euro 4.280) per million British thermal units (MMBtu) briefly before retreating on Monday, a level last seen in December 2022. Meanwhile, crude oil futures, including WTI and Brent, surged to their highest levels since August 2024.

The price surge in natural gas was primarily caused by soaring demands amid cold weather in the northern hemisphere, while the jump in crude prices was triggered by new sanctions imposed by the outgoing Biden administration. 

Natural gas prices have doubled since October 2024 from under Dollar 2 per MMBtu to just under USD 4 per MMBtu as of Tuesday in the Asian session. According to the US Energy Information Administration, natural gas futures for delivery at the Title Transfer Facility (TTF) in the Netherlands increased to a weekly average of USD 14.55 per MMBtu by the week ending 8 January, 27% higher than the same period last year.

The WTI futures surged by 17% and the Brent futures have jumped 14% since early December, reaching thresholds of Dollar 78 and Dollar 80 per barrel respectively.

Data from the American Petroleum Institute (API) showed that the US oil inventory has fallen for the seventh consecutive week ending 5 January. Last Friday, the US announced wider sanctions on Russia's oil exports, targeting producers Gazprom Neft and Surgutneftegaz, as well as 183 vessels that have shipped Russian oil.

The elevated energy prices pose significant risks to the eurozone's economy, particularly affecting manufacturing activities as the European nations grapple with political uncertainties, one week ahead of Donald Trump's inauguration.

Surging energy prices could complicate the inflation outlook in the Euro area, echoing the crisis experienced when Russia launched aggression against Ukraine in 2022. The European Central Bank (ECB) is likely to face the challenges in balancing economic growth with mounting inflationary pressures this year.  "We'd have to see prices rise a bit higher from here but there is the risk that stronger energy prices lead to a stagflationary mix in Europe, which obviously can't sort out its energy policy and is dealing with typically moribund growth", Kyle Rodda, a senior market analyst at Compital.com Australia, said.

Stagflation refers to an economy characterized by high inflation, stagnant economic growth, and elevated unemployment – a scenario the eurozone appears increasingly at risk of meeting.

S&P Global projected in November that the eurozone GDP growth will reach 0.8% in 2024 and 1.2% in 2025, based on accelerating ECB's rate cuts and a lower inflation outlook. "Due to a more pronounced drop in energy prices, we expect inflation will be marginally lower in 2025 than we anticipated." This suggests that a resurgence in energy prices could undermine these projections.