Gas years traditionally begin at the start of October and Gas Year 2022 is dominated by two uncertainties: the weather and supply challenges.
- The 2021 Gas Year saw unprecedented volatility in prices in Europe, but a number of countries have stepped in to mitigate the Russia gas shortfall.
- However, there remain some questions about how this extra supply can be assimilated.
- Consumption – and therefore cost – of Natural Gas in Europe will also be shaped by the weather. Current short-term forecasts are mild but that could change.
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Below sets out a wider range of drivers of Natural Gas prices for the year ahead, but the impact of the Ukraine conflict has made supply chain concerns and the weather the predominant factors in gas prices for the months ahead.
Gas Price Drivers
Decline Drivers
- Mild winter in both the Atlantic and Pacific basins
- Strong increase in expected LNG arrivals and increased regasification capacity across NWE
- Stronger than forecast drop in LDZ consumption if Europe heeds the demand reduction messages coming from the EU.
- Industrial demand might fall further in line with growing global economic weakness and high inflationary pressure.
- Norwegian production remains maxed out this winter.
Resilient Drivers
- Risk of storage depletion is high especially if we have a sustained spell of below normal temperatures.
- Strong increase in gas for power demand.
- French nuclear generation uncertainty and low hydro balance across NWE
- Any significant production outages (Norway & UK).
- Damage to European gas infrastructure.
- Lower renewable generation, notably windspeeds in Germany. Intermittency of renewables makes it a big risk in this tight market.
- Disruption to US LNG exports.
- Drop in production and subsequent phase-out of Groningen gas.
- Rebound in the Chinese economy leading to a ramp-up in LNG import demand.
- Cessation of Russian flows via Velke Kapusany
Northwest Europe is entering the new Gas Year 2022 without Russian supply. Despite a relatively healthy storage inventory – as of 1 October European inventories are filled at 88%, well above the 80% target for 1 November. EU gas storages are currently 94% full and on track to exceed the minimum year-end target of 85%, notwithstanding any demand or supply shocks in the interim.
Summer 2022 – the end of the Gas Year 2021/2022 – was the most volatile summer ever observed in European energy markets as a succession of events caused price surges. The rouble payment scheme, transit flow interruption via Ukraine; turbine issues at the Portovoya compressor station and unexplained explosions on the Nord Stream 1&2 pipelines all impacted supply and drove volatility.
Gas Supply
Qatar, Nigeria, Norway, and the US have unprecedentedly increased supplies of natural gas to Northwest Europe, the shipping of which has contributed to high levels of reserves in many European countries. Furthermore, China, India and Pakistan, have consumed much less Natural Gas than was forecast due to soaring prices and softer domestic demand which has exacerbated the fall in global demand.
Our base case scenario is that NW Europe will import an additional 18 billion cubic metres (bcm) of natural gas this year. The question here is whether Europe can quickly and easily accommodate the vast increase in imports and whether any supply chain issues could interrupt the flow. For example, Norway – which has upped its supply of Natural Gas – has scheduled engineering work in summer 2023 which will slow supplies, while Dutch gas supplies are on a steady decline.
Weather
Europe’s mild autumn has so far been accompanied by a softening of prices.
45 day forecast for NWE displaying LDZ (domestic) consumption.
However, the challenge is longer-term prices over the winter.
Our base case demand scenario for this winter is based on the average weather over the last 20 years. It suggests total consumption in Northwest Europe (NEW) to be in line with the last year. We have factored in an already observed industrial demand disruption over the past few months to continue across our forecast horizon.
Forecast
With these great uncertainties in mind, we build our base case view on Winter 2022 (WIN22) to Summer 2024 (SUM24) fundamentals trying to assess where baseload supply and demand could be and what it means for storage inventories and the call for demand disruption.
Our base case forecast for total LNG supply to Northwest Europe, including the UK, is 52bcm during WIN22 – an increase of 18bcm winter on winter, with the US accounting for the bulk of the increase.
The competition for cargoes with Asian markets will be fierce, particularly if we see a resurgence in Chinese demand and or a colder-than-average Pacific Basin winter.
The ability of Europe to change trends in its demand behaviour and reduce gas consumption will be key in navigating the upcoming winter and following summer. Unless the two following winters are mild, the European market will remain tight and there is a need for demand disruption on top of our base case to balance the Northwest European market.
The ability of Europe to change trends in its demand behaviour and reduce gas consumption will be key in navigating the upcoming winter and following summer.
The robust growth in regasification capacity – converting liquified natural gas – in North Western Europe should help bring more LNG to the region, but it will not be able to fully offset the Russian supply.
Norway, which saw a record high piped exports in GY22 at 117bcm, will continue maximising production, while we expect similar winter exports, summer exports are likely to be lower amid heavier SUM23 maintenance.
Our base case demand scenario is based on the average weather over the last 20 years. It indicates total (LDZ and non-LDZ) consumption in NWE to be in line with the last year. We factor in an already observed industrial demand disruption over the last months to continue across our forecast horizon.
The weather will remain at the heart of demand uncertainty and will have a significant impact on Europe’s ability to balance the market. Our core conclusion is that unless the two following winters are mild, without Russian gas the European market will remain tight and there is a need for demand disruption on top of our base case to balance the Northwest European market. In the event of a sustained spell of below-normal weather or a beast from the east scenario, there is a much greater risk of gas shortages.
