Key takeaways:
- European power prices have fallen to pre-Ukraine invasion levels for winter contracts.
- Weather-adjusted residential and commercial consumption appears to be tracking 10–15% below average, with industrial demand showing reductions of 25% or more.
- Europe is racing to build LNG import infrastructure. A first full cargo of LNG arrived at Germany’s new floating regasification unit at Wilhelmshaven on January 3.
- A key factor in 2023 will be LNG demand in Asia, and whether Europe faces increased competition for supplies.
2022 was a year of crisis in European energy markets. Russia’s state gas company Gazprom, which has historically provided around 40% of European gas supply, gradually reduced supply to its European customers over the course of the year—remaining Russian flows are now just 8% of supply.
Driven by reduced Russian supply along with EU member state measures to ensure storage fill—regardless of price—EU benchmark gas prices reached record heights in August, and took electricity prices with them. This prompted the EU and its member states to step up their emergency measures to address the crisis.
Mild weather to the rescue
The price spikes of August seemed to augur a difficult winter—in fact the situation has improved dramatically since then, thanks in large part to extremely mild weather in October and November (and again in January 2023). As of 11 January 2023, EU gas storage facilities were over 83% full—very close to an all-time record for this point in winter.
Meanwhile gas demand has plummeted, and put the EU on track to exceed its 15% target for gas demand reduction this winter (SPGCI currently projects demand to be 16% lower relative to recent previous winters). The main driver has been a sharp decline in industrial demand as factories switch to oil products, improve their efficiency of gas use, turn down thermostats, and—in relatively rare cases—shut down. Residential and commercial demand is also sharply down, even on a weather adjusted basis, thanks to changing behaviour.
High storage levels and lower demand have brought prices at the Dutch TTF hub down to around €70/MWh, and SPGCI now forecasts summer TTF prices to average around €50/MWh during the summer of 2023. Fears over the potential difficulty and price impact have been eased by high storage levels—we now see EU storage finishing the withdrawal season (at the end of March) approximately 55% full, dramatically reducing the challenge of storage fill in summer 2023.
Europe is forced to navigate the Energy Transition amid crisis
While prices have eased, they still remain above the levels that were previously “normal” in Europe. And though gas demand has declined, much of the energy previously provided by Russian pipeline gas must still be replaced. While Europe’s REPowerEU plan emphasizes speeding up the deployment of renewables, the electrification of heating through heat pumps, and the emergence of low-carbon hydrogen, the main answer in the short term is LNG>
Led by Germany, Europe is racing to build LNG import infrastructure. SPGCI’s LNG analytics shows that nearly 50 Bcm of new regasificaiton capacity will come on line in 2023 (including December 2022), an increase of 20% in just 13 months. This will not only ensure access to LNG; it will also ease the logistic constraints that drove the unusual dislocation between SPGCI’s Northwest European marker—and assessment of DES LNG prices at delivery into NW Europe—and the TTF inland hub.
On January 3, 2022, Germany received its first full cargo of LNG at its new floating terminal at Wilhelmshaven. The cargo forms part of the commissioning process at Wilhelmshaven, with commercial operations expected to start in mid-January.
LNG production is strong globally and is in extremely high demand. US LNG cargoes continue to point toward Europe. In 2022, S&P Global data showed the following:
- France received 164 US LNG cargoes, followed by the UK with 136 and Spain with 131 cargoes
- The Netherlands received the fourth-most US LNG cargoes with 104, followed by South Korea with 85
- Europe, plus Turkey, received 770 of the 1,129 US LNG cargoes delivered to countries in 2022.
The chart above, compiled by S&P Global Commodity Insights in the European gas price outlook and drivers report, shows record volumes of LNG deliveries to Europe since November 2022. The US is the single biggest source.
A lack of new US capacity coming online in 2023 could pressure the global gas markets. Another key factor in 2023 will be demand in Asia, and whether Europe faces increased competition for supplies.