Around a quarter of Europe’s energy consumption is met with gas, and 80% of it is imported. Of the total demand, about a quarter is used for power generation, another quarter for industry, and most of the remaining half for heating. But Europe basically lost more than a third of its gas with the war in Ukraine and ensuing sanctions.
Russia covered 40% of the region’s gas imports before the war with cheap piped flows flooding mainly from Germany. Now, it covers around 15%, including the liquified form of natural gas, known as LNG, and piped supplies.
But that was only possible due to demand destruction and LNG imports.
And now Europe depends on LNG, mainly from the US, on top of the ongoing piped supplies from Norway, Algeria, and Azerbaijan, to balance its gas market.
Market tightness has now relaxed as well. Prices spiked to records of around EUR 350/MWh at the height of the crisis as Russian supplies to Europe dwindled.
But spot prices on the Dutch TTF hub have averaged around EUR 28/MWh so far this year, compared to more than EUR 40/MWh in 2023, and EUR 121/MWh in 2022. Forward prices also foreshadow lower average spot prices in 2024 than in 2021 (before Russia’s invasion of Ukraine) and Europe’s decision to break off gas ties with its neighbour by 2027.
That’s because Europe has never exited winter with such high storage as in 2024. Meanwhile, imports remain robust and demand has tumbled, leading to prices to fall to pre-war levels.
And it sets the stage for a bearish horizon until next winter at least, barring no major disruption.
Demand destruction
The market balanced itself though mostly by cutting demand, simply because replacing Russian supplies completely would have been impossible at such short notice. Europe consumed around 20% less gas last year compared to prewar levels.
That is beyond the goal of cutting demand by 15% compared to the previous five-year average, between August 2022 and March 2023, with measures extended to 2024 and 2025. Some of it has come from renewable power replacing gas power generation and some from efficiency. But the bulk is coming from industrial cuts, many of which are likely to be irrecoverable.
LNG to the rescue
The second factor that allowed Europe to survive was LNG.
Gas pipeline imports are already operating at maximum levels, with only limited additional capacity coming online in the future. Norway is by far the single biggest supplier, but LNG as a supply source has come to rival it as the most important gas lifeline into Europe, covering 40% of total gas demand. The continent built 40bcm of additional import infrastructure and 30bcm more are expected this year.
Most of the LNG entering Europe though is sourced in the spot market, as Europe remains mostly uncommitted to gas as a long-term fuel. That makes it more expensive and less reliable.
Crisis ongoing
So far this year supply has been sufficient to meet Europe’s voracious demand. But that’s because production has been strong, with few interruptions globally, and demand has been soft on the back of two consecutive mild winters.
Indeed, in the last two years Asian demand has also been lukewarm, mostly amid a sluggish Chinese economy, but that is changing. There are signs that Asian demand is recovering, which spells trouble for Europe when competing for the LNG.
Until 2026, when more production starts coming online, markets are set to remain tight. This means any disruption will continue to bring high and volatile prices.
Europe will remain exposed to global gas shocks at least for another two years, when a gush of new LNG production starts easing market tightness.
Risks abound
There are a myriad of risks (mostly geopolitical) to consider, but the always unpredictable weather itself could be the biggest threat. Any strong increase in global demand will tighten European gas markets, whether we see cold in Asia or a drought in Brazil.
On the geopolitical front, the Strait of Hormuz, where 20% of the world’s LNG flows through, could become entangled in a broader Middle Eastern conflict that pits Israel against Iran.
Closer to Europe’s borders, a transit and interconnector deal between Russia and Ukraine is set to expire at the end of 2024, with no sign that it will be extended. That’s around 8% of the Europe’s gas supply that it will also need to replace with LNG starting in 2025.
There are also unplanned outages, like the one that recently affected Freeport LNG in the US, and now Gorgon LNG in Australia, which threaten supply.
And in a global market, any disruption causes significant impacts.
Buy the rumour, sell the fact
And so what remains until next winter will be a combination of bearish signals on a well-supplied market, jumping on any perceived fundamental threat, however distant. LNG will keep flowing and Europe is set to continue outbidding for it when it needs to.
Storage targets of reaching 90% full by November will be met way ahead of time, barring any unforeseen calamitous event.
But the region will need to remain alert if it is to secure enough gas at affordable prices. After all, Europe’s economic web depends on it.
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