Gas prices in Europe face an uncertain future – TBEN – 01/09/2023

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Natural gas prices in Europe fell at the end of 2022, with the European reference contract, the Dutch Title Transfer Facility (TTF), priced at €76 ($80) per megawatt hour (MWh), close to the pre-Ukraine war level of €75 in December 2021 .

Shortly before, in August, EU prices rose to a record high of €350/MWh due to shortages caused by Russia’s stock-cutting.

As natural gas prices rose in Europe, European buyers looked for alternatives by importing liquefied natural gas (LNG) from the US and elsewhere to meet reserve requirements before winter.

Nord Stream 2 was supposed to bring gas to Germany and beyondImage: Maxim Shemetov/REUTERS

Is it over yet?

Experts say the worst is now over, with gas prices falling from historic highs. “However, that doesn’t mean the energy crisis is over,” Toby Copson, global head of trading at Trident LNG, told TBEN.

And next winter could be quite tougher, with little Russian supply to fill the storage. Russia will deliver 60 billion cubic meters of gas to Europe by 2022, about half of what was contracted.

“How difficult it will be depends on the weather, Chinese demand and the availability of LNG,” Adi Imsirovic, a senior research fellow at the Oxford Institute for Energy Studies, told TBEN.

There are a number of factors that keep Europe in a better position than last year: milder temperatures than usual, reduced demand for heating, high storage capacity and increased supply due to a largely absent China from the spot market.

But this could change drastically if the weather changes and storage starts to run out. “On top of that, you have the added concern of the Chinese coming out of the COVID peak and returning to a demand player – all this would leave Europe competing for what is available with one of the largest buyers in the market,” Copson said. .

The weather is crucial

The weather will play a crucial role. “It looks good for the time being, but the International Energy Agency took into account a new cold snap at the end of March in its winter forecasts. So we’re not out of the woods yet,” Bram Claeys, senior advisor at the Regulatory Assistance Project, an impartial organization focused on the green transition, told TBEN.

“However, the forecast is that Europe will come out of winter with less than 15% in storage (versus the historical 30-35%) and this will lead to prices staying above historical levels as demand is higher to meet the storage. filling,” Ashley Kelty, director of oil and gas at Panmure Gordon, a corporate investment banking firm, told TBEN.

Nord Stream pipelines map

Gas price predictions

Experts believe that prices will remain high for at least a few more years until demand slows down and more supply arrives from the US.

“I don’t think gas prices will return to historic levels in the foreseeable future. This is due to LNG being more expensive, the lack of supply of offshore gas in Europe and the absence of Russian supplies,” said Kelty.

The wind has helped a lot lately and in Belgium the nuclear reactor Tihange 1 is back online. But this too can change quickly. “The underlying structural reasons for the high prices remain valid. The war in Ukraine is far from over, the gas supply from Russia has been and remains decimated and the French nuclear park is still largely in the doldrums,” said Claeys.

“The price is down from its late 2022 high, but characterizing €77/MWh as a price level that indicates things are good is a mischaracterization. But I think it’s all relative,” says Ken Medlock , co-author of a recent report on the gas sector in the EU.

Europe is adapting to high energy costs

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Storage relatively healthy

At the beginning of December 2022, European gas storage levels were about 92% filled, a high for the time of year and a nearly 10-year high due to milder weather conditions heading into winter.

Most EU countries’ gas storage levels are well above their five-year average, but the main questions hinge on how Europe’s reserves will be replenished after the winter, assuming Russian deliveries do not resume.

Goldman Sachs expects storage facilities to remain at least 20% full by the end of March 2023, while energy research firm Wood Mackenzie says an unusually cold winter in the Northern Hemisphere could reduce European gas supplies to 4% of total capacity by March.

Akademik Cherskiy is working on the construction of the Nord Stream 2 gas pipeline
Akademik Cherskiy, a pipe-laying vessel owned by Gazprom, was key to completing the construction of the Nord Stream 2 gas pipelineImage: Vitaly Nevar/REUTERS

China is the wild card

An important factor is China and how the COVID wave there will affect the economy and demand for gas in Europe.

“Last year we were able to replenish our reserves, partly because the demand for LNG in China was low. This may change and have consequences for Europe’s ability to attract sufficient LNG in the run-up to next winter,” said Claeys.

China National Offshore Oil Corp has forecast that China’s natural gas imports will be 7% higher year-on-year by 2023. The extra demand could test Europe’s efforts to bring in more shipments as buyers there work to replenish stocks for next winter without Russian imports.

Is the price cap a block?

The EU’s decision to cap gas prices could jeopardize the bloc’s efforts to replenish storage supplies this summer, experts warn.

EU members supported the price cap as a way to limit Russia’s influence on the EU gas market. Some countries are spending billions of euros to limit the impact of rising energy prices on households.

The cap would be activated if the TTF monthly contract rises above €180/MWh for three consecutive business days. When activated, the cap would remain in place for a minimum of 20 business days.

Critics say the price cap would allow Asian buyers such as China and India to become more competitive in the spot market.

Long term effect

“The economic ripple effects can be quite problematic in the long run,” Anna Mikulska, an energy expert at Rice University, told TBEN.

“While the problem of gas availability is acute, its chronic effect may be flight from energy-intensive and especially gas-intensive industries and relocation where prices are likely to be lower,” added Mikulska.

Others focus on the political consequences.

“In 2023, it remains imperative for EU leaders not to succumb to Russian energy armaments, and instead to support Ukraine with as much military and humanitarian aid as is necessary to achieve Ukraine’s stated goals of the full restoration of its sovereignty. and territorial integrity,” said Benjamin. L. Schmitt, a research fellow at Harvard University and a senior fellow at the Center for European Policy Analysis, told TBEN.

Edited by: Tim Rooks