Despite high levels of gas in storage, the risks of a potentially cold winter and a further cut in Russian gas supply mean that market volatility remains high.
» As part of the fallout from the Russia-Ukraine conflict, gas supply to Europe remains severely constrained, with Russian pipe gas deliveries to the EU being restricted to 25 bcma currently, versus 140 bcma in 2021. This gas is flowing through Ukraine and Turkstream, and there is growing speculation about what will happen when Gazprom and Ukraine’s transit contract ends in December 2024.
» The drop in Russian flow has to a large extent been compensated by extra LNG imports – around 50 bcma more
than in 2021. That includes more LNG from Russia – some 15-20 bcma. Neither Russia nor its European customers seem to be considering a cut in this supply, as LNG is a global market and the redirection of Russian LNG to the Asian markets would have a limited global impact (including on prices). On the other hand, it remains to be seen if Novatek can start Arctic-2 LNG plant as early as 2024/2025 and if such is the case, where these cargoes will go.
than in 2021. That includes more LNG from Russia – some 15-20 bcma. Neither Russia nor its European customers seem to be considering a cut in this supply, as LNG is a global market and the redirection of Russian LNG to the Asian markets would have a limited global impact (including on prices). On the other hand, it remains to be seen if Novatek can start Arctic-2 LNG plant as early as 2024/2025 and if such is the case, where these cargoes will go.
» Due to a mild 2022/2023 winter in Europe and relatively low demand in Asia, the LNG market in 2023 is not as tight as it was in the previous year. LNG imports to Europe in July and August this year, for instance, were below the 2022 level.
» Europe has been able to refill its gas storage facilities to very close to its maximum capacity, reaching 94% by mid-September, surpassing the 90% by November 1 EU deadline. European traders have also been storing some gas in the western Ukrainian underground storages.
» Nevertheless, the uncertainties regarding Russian pipe gas and LNG flow and the consciousness that the security of natural gas supply to Europe isn’t guaranteed if the winter is cold, have meant that volatility on the European market and therefore the global LNG market remains high. For instance, the threat of a strike on some LNG facilities in Australia in September had a significant impact on the short term gas prices in Europe.
» Globally the short-term prices in Europe have hovered in the past months in the €30-40 per MWh range, far below the peaks of above €300 per MWh seen in 2022, but still about twice the usual level seen in 2010-2020. The projected price for 2024 of around €50 per MWh still shows that market players consider a high risk of an unbalance.
Consumption remains low, dented by last
year’s high prices. There are fewer long-term
LNG supply contracts being signed this year,
and there are indications that the impact of
the European Commission’s joint purchasing
mechanism has been only modest..
» High prices and the low level of economic activity in many countries in Europe, some of which are suffering recessions, mean that gas consumption remains 10-25% below the average of 2017-2021. This drop is the result of greater energy efficiency, voluntary reductions by customers looking to cut their energy bills and avoid supply disruptions, and demand destruction, in the form of some industrial plants closing down in 2022.
» After a wave of long-term LNG contracts dedicated to Europe were signed in 2022 and early 2023, the last six months have been quieter on this front, and it is clear that only a small share of the missing Russian supply has been replaced with long-term LNG supply. More contracts may be signed in the coming month, but this slowdown in contractual activity seems to signal a clear and deliberate choice by some utilities to stick with supplies on a short-term basis. This choice can be explained by fears they have of having too much gas supply after 2040, when EU gas consumption will probably decrease sharply. European buyers are essentially accepting the price risk over the volume risk.