Nothing lasts forever under winter

Europe has practically solved the problem of passing this heating season – abnormally warm weather in November and early January allowed the EU countries to save gas and keep reserves in storage almost at a record level in history. Gas prices on the continent at the beginning of 2023 fell to $780 per 1,000 cubic meters, returning to a year ago. The main question now is whether gas consumption will rise as a result of falling prices and whether the current quotes, which have already fallen below prices in Asia, will remain attractive to LNG suppliers.

The abnormally warm beginning of January in Europe forced gas prices on the continent to collapse to €69 per 1 MWh ($780 per 1,000 cubic meters) in the nearest futures on the TTF index. This is the lowest figure in the last year and five times less than the peak gas price in August 2022. The main reason for the fall in gas prices, in addition to warm weather (for example, in Berlin on New Year’s Eve, the temperature was +15 C °), was an increase in wind generation. “The beginning of January 2023 was the warmest in at least 15 years,” analysts at consulting firm EBW Analytics said in a report to clients.

At the beginning of the month, gas consumption dropped so much that on some days storage facilities switched to net injection mode and, on January 6, the EU average was 83.2% full (83.9 billion cubic meters).

This is the highest level in the history of observations, with the exception of the winter of 2019/20, when on January 6 there were 87.8 billion cubic meters in EU storage facilities – then Europe was preparing for a possible cessation of the transit of Russian gas through Ukraine, and Gazprom specially stockpiled in its European UGS additional gas.

This winter, starting January 4, Gazprom began to reduce supplies to Europe through Ukraine from the usual level of 42 million cubic meters per day to 35.5 million cubic meters per day by January 8. The company did not name the reason, but this may be due to a sharp cold snap in most of Russia in the first half of January. Gas consumption for power generation and heating needs has increased significantly, and although Gazprom currently has no shortage of production capacity in principle, it may not be practical to run them for just a week to cover peak loads. The reduction in supplies from Russia did not have any impact on the dynamics of gas prices in Europe, since the share of Russian pipeline gas in European consumption is now only about 4%.

The head of Germany’s Bundesnetzagentur energy regulator, Klaus Müller, said in an interview with Bild am Sonntag on January 7 that Germany won’t have to face gas supply problems this winter.

He estimates that the country will end this heating season with more than half full storage (now 91% full), and the authorities should now focus on preparing for next winter. At the same time, Mr. Muller believes that gas prices in Europe will remain at the current elevated level for one to two years.

Many Western analysts previously considered the level of $800 per 1,000 cubic meters as a threshold, below which gas consumption in the EU will begin to recover. In 2022, it was the reduction in consumption that allowed the EU countries to fill storage facilities before winter, despite a sharp drop in Russian gas supplies: for example, in Germany, consumption fell by 14%. The increase in consumption due to falling prices may affect gas reserves in storage and further market assessments regarding preparations for the winter of 2023/24. At the same time, the experience of the 2008-2009 crisis in the European economy suggests that gas use, even after the return of normal market conditions, may never recover to its previous level, as some consumers switch to another source of energy, while others cannot withstand competition and replaced by imported products.

More significant in the short term, the price of LNG in Northwest Europe fell to an eight-month low of about $20/MBTU late in the first week of January and was below the price of supplies to Northeast Asia.

This may lead to a gradual outflow of cargo from the Atlantic to the Pacific basin. At the same time, judging by the dynamics of derivatives, cargo for delivery in the summer of 2023 in Europe is still more expensive than in Asia, reflecting the EU’s need to fill storage facilities ahead of next winter.

Yuri Barsukov