Natgas market under the weather

2 mins read

The lack of new liquefaction capacity coming online in the US, combined with low additions globally in 2023, stands to pressure the gas market as it grapples with extreme volatility and persistently high prices.

In fact, there will not be any significant new volumes of LNG coming into the market for 2-4 years.

The Qatar Energy minister warned that this “can be a cause for future volatility.”

European gas price has slumped to a 16-month low on a strong supply outlook, with the TTF price down to €55/MWh.

However, there are forecasts that before the end of January, the weather in Europe will change into freezing conditions.

If this happens, gas consumption and prices will go up.

Refilling Europe’s storage in the summer for next winter will be more challenging.

Russian gas supply will be substantially less this year, and US LNG capacity is flatlining.

Such developments may pose challenges for Europe later in the year.

US Special Presidential Envoy for Climate John Kerry admitted that natgas could help the climate, but only with carbon capture.

He said gas is clearly part of the transitional effort.

Cold winters ahead

Ursula von der Leyen, president of the European Commission, was confident.

Speaking on 12 December, she said, “we are safe for this winter. Russia’s blackmail has failed.”

It was a confidence born of a sure-footed start to winter.

It may also turn out to have been premature.

However, the Economist is warning that Europe looks increasingly complacent about the winter ahead.

It has navigated the first cold spell. But there are more to come.

Iberdrola’s executive chair agrees.

He said Europe has been “lucky” this winter as mild weather reduced fuel demand, but the region hasn’t seen the end of an energy crisis.

European gas demand is down over 20% y-o-y, but much of that has been replaced by coal, which is unsustainable.

Germany is set to boost its reliance on coal even further as it battles an unprecedented energy crisis — even at the expense of its ambitious climate goals.

The IEA is warning that even Europe has made “impressive progress” in reducing its reliance on Russian gas supplies, 2023 could still bring new gas shortages.

The IEA identifies five priority action areas for the EU: quicken improvements in energy efficiency; roll out renewables more rapidly; switch to electric heat, especially through heat pumps; encourage behaviour changes and scale-up gas supply.

The EU leaders’ summit on 14 December concluded that Union members must push for more gas deals next year — including long-term contracts — to replace Russian supplies.

They should also accelerate talks with reliable suppliers “to secure the supply of gas given winter 2023/2024 to conclude long-term contracts.”

But such contracts would breach the EU’s climate targets and may not be agreed.

In Europe, 2022 saw the worst drought in 500 years; 2023 started with the lowest snow level in the last 600 years.

It will impact energy production – hydroelectricity and water cooling in nuclear.

To facilitate and accelerate the uptake of renewables, European grids need a technological transformation.

China LNG demand to rise

Xi Jinping’s plan to reset China’s economy and win back friends has just started.

Robust growth in China’s economy will impact energy demand and prices in 2023.

With the Chinese economy expected to grow more than 5%, Chinese demand for LNG will be substantially up this year.

US LNG supply is expected to increase this year, but with Asian demand up, it may not help Europe.

China’s population shrunk to 1.41 billion last year for the first time in 60 years.

It may have long-term consequences for domestic and world economies if it continues.

Could this be a historical shift?

Even though the drop is small, it is already spooking the oil markets concerned that China’s oil demand has peaked.

However, with the economy growing again and living standards rising, peaking oil demand is a few years down the line, much the same as for the rest of the world.

China is buying record amounts of Russian oil, LNG, and coal. India is too.

Dr Charles Ellinas is Senior Fellow at the Global Energy Center, Atlantic Council

Tw: @CharlesEllinas