Column by Yuri Barsukov on the long term of low gas prices in Europe

Gas prices in Europe in February, two months before the end of the heating season, confidently dropped below $300 per 1 thousand cubic meters. This seemingly return to “normality” after the sharp upswings of the last two years nevertheless leaves many questions. There are a number of reasons why gas prices have fallen despite Russian supplies to Europe falling by 100 billion cubic meters in 2023, equivalent to about a third of all EU gas imports. This includes a reduction in demand for gas in generation due to a larger share of renewable energy sources and coal, warmer weather this winter, high gas reserves in storage, as well as significant supplies of LNG, made possible due to the slowdown in economic growth in China. However, the main structural reason for the fall in prices was the reduction in gas demand in Europe: according to IEA estimates, it fell by 7% in 2023, to the lowest level since 1995.

Now that gas prices are returning to the usual range of $200–400 per 1 thousand cubic meters, in which they have been for the most part over the past 15 years, the main question is when the process of destruction of gas demand in Europe will stop and to what extent the lost volumes can be return. The further price trajectory depends on the answer to this question, since if new volumes of LNG come to the market in 2025, but there is not enough demand from industry, then gas prices will have to fall to $150–180 per 1 thousand cubic meters in order to gas began to displace coal from power generation and thus found a niche for itself. And this period of low prices may turn out to be very long, since industrial consumers in Germany, after the price shock of 2022, began not only to suspend production, but also to close it completely, moving factories to countries with lower energy costs. For this trend to change, gas prices in Europe must remain consistently low for a long time. It is unclear to what extent this can be achieved, given that dependence on LNG has made the European gas market much more volatile and is now directly affected by, for example, droughts in South America and hurricane activity in the Gulf of Mexico.

For Russian gas producers, this means that the pivot to the east may turn out to be much more uncontested than it seemed in 2022. After all, when conditions arise for the return of Russian gas to Europe, this export market may no longer exist in its previous form, both in terms of volumes and supply margins. Will Gazprom then, as in 2018, be interested in a price war with American LNG for a larger share of this dying market? Probably, only if the Russian company does not have more marginal export directions.