●For approximately 500 days (in 2021–2023), Europe was
gripped by an unprecedented energy crisis that was characterised by record-high
prices—especially for natural gas.
●Supply issues induced by the changing
geopolitical landscape have been the central cause of the crisis.
●After reaching an extraordinarily high
level of €311 per MWh in the summer of 2022, natural
gas prices have dropped by more than 80% by winter 2023, but they remain more
than two times higher than their long-term historical average.
●Europe has managed to withstand the most acute phase of the
crisis but at a rather large cost.
●Overall, Europe has adapted and managed to
accumulate substantial natural gas inventories, but the situation remains
fragile and prices volatile.
●Although the probability of an energy
crisis returning this winter is relatively low, such possibility still remains.
While there are
many aspects of the energy crisis in Europe within several markets, including
crude oil, coal, electricity, and emission allowances, as well as within
several domains, such as EU energy policies and regulation, diplomacy and
international relations, this article will focus exclusively on the natural gas
market, because it is here where the energy crisis has been most pronounced.
Europe faced an
unprecedented energy crisis for around seventeen months (from September 2021 to
February 2023), as coal, natural gas, and electricity prices surged to all-time
highs. Governments across the continent rushed in to introduce energy-saving measures
and implement conservation policies, while households and businesses had to cut
consumption rapidly.
Moreover, the
conflict in Ukraine has disrupted energy supplies as the European Union (EU)
has prohibited the maritime transport of Russian crude oil and has set a target
for the bloc to phase out imports from Russia by 2027. Furthermore, three of
the four lines of the Nord Stream pipeline were damaged by unknown explosions,
limiting Europe’s supply options. Either way, importing cheap pipeline gas from
Russia no longer seems like a viable option for Europe as relations between the
two actors remain strained.
Now, as 2023 draws
to a close, can we confidently conclude that the energy crisis in Europe is
over? How prepared is Europe to cope with the upcoming winter? What are the
risks and challenges that lie ahead?
History
Kar Yong Ang, Octa
analyst, has succinctly summarised the context: ‘Europe’s energy
crisis was long in the making. As the global economy recovered from the
recession caused by COVID-19, the demand for LNG [liquified natural gas] surged
in the summer of 2021. However, the supply could not immediately cope with the
rising demand, so prices across the globe went up. Higher prices, coupled with
LNG supply constraints and sluggish European production, prevented the European
states from restocking natural gas to adequate levels before the winter.
Another shock came in December 2021, when gas flows from Russia along the Yamal
Europe route dropped sharply—ostensibly due to maintenance. Then, as you know,
the armed conflict in Ukraine broke out, taking the whole continent to a
totally different reality and sending energy costs to the stratosphere.’
Natural
gas price in Europe (Title Transfer Facility, TTF)
Source: Refinitiv
The
energy crisis’s most acute phase occurred in the summer of 2022. One only needs
to look at the evolution of Europe’s benchmark natural gas price (TTF) to
assess the scale of the emergency (see the chart above). On 25 August 2022, TTF
price reached €311 per megawatt-hour (MWh), the highest level ever recorded. On
that specific day, the price was 44% above the previous maximum reached on
March 7, 2022, and was a staggering 18 times higher than the three-year average
price recorded over 2019-2021. Despite Europe’s gas storage sites being 78%
full in August 2022, supply worries were rife as imports from Russia dropped by
around 60%, forcing Europe to rely extensively on liquefied natural gas (LNG)
imports—especially from the United States. However, the aggregate supply of LNG
in the global market at that time was reduced as one of the U.S. LNG export
plants—Freeport LNG—had to go offline due to an explosion incident. Thus, to
secure an adequate number of LNG cargoes, Europe had to outbid other customers
in South and East Asia by agreeing to pay higher prices to suppliers.
A lot has changed
since last summer. Europe has adopted and managed to reduce demand, find new
suppliers and build natural gas stocks to comfortable levels. The European gas
prices have returned to normality but remain above the level observed before
the crisis. On Monday, 6 December, the front-month futures contract for
delivery in January at TTF settled at €39.25 per MWh, 87% below the peak
observed in August 2022 but still some two times above the historical average
seen in 2019-2021. Kar Yong Ang, Octa analyst singles out several reasons for
normalisation:
‘Although natural gas prices in Europe remain higher than they were
before the crisis, the situation has improved dramatically. Indeed, the
contrast with 2022 looks quite impressive. There are several reasons for this.
First, there was a structural loss of demand partly due to reduced economic
activity and partly due to conservation policies. Second, imports of pipeline
gas from Norway have increased, as well as LNG imports from the United States
and other countries. On top of it, there was a bit of luck as well, as weather
conditions allowed the Europeans to build the stocks faster than normal.’
Indeed, probably
the most painful yet effective adjustment that Europe had to endure was the
loss of demand. According to Eurostat, total
gas use in the EU’s top 6 consuming countries—Germany, Italy, France,
Netherlands, Spain, and Poland—was down by 17% in the first ten months of 2023
compared with the five-year average for 2017-2021. Obviously, energy-intensive
industries such as chemicals and steel production had to bear the brunt of
adjustment. For example, according to Statistisches
Bundesamt, Germany’s energy-intensive manufacturing production has decreased
by about 20% since the start of 2022 and has not shown any signs of recovery
yet.
At the same time,
however, as consumption went down, so did local supply. According to Eurostat, total
indigenous production in the EU’s top 6 gas-producing countries—Germany, Italy,
Hungary, Netherlands, Poland, and Romania—was down by 41% in the first ten
months of 2023 compared with the five-year average for 2017-2021. The key
reason for the continuing drop in production in Europe is the gradual phasing
out of the Groningen natural gas field, Europe’s largest one, where a series of
earthquakes led the government to shut down production.
Thus, Europe had to
rely on imports more and more to balance its natural gas market. Russia has
long been the main supplier of affordable pipeline gas into Europe, but
geopolitical tensions, sanctions, and explosions of the Nord Stream pipeline
have brought the flows to a minimum. According to Eurostat, Russia
exported just 22.3 billion cubic metres of natural gas into Europe in the first
nine months of 2023, which is 57% lower than during the same period in 2022 and
65% lower than during the same period in 2021. Concurrently, imports of LNG
from the United States reached 30.01 billion cubic metres during the first nine
months of the year, up a whopping 185% from the same period in 2021.
Another factor that
helped Europe fill the supply gap and live through the volatile months of 2022
was pure luck. Indeed, the unusually warm winter in 2022–2023 lowered the
heating demand and allowed the European states to start building stocks earlier
than usual. This year’s weather conditions have also been quite favourable.
Windy and wet weather increased electricity generation from renewable sources,
while mild temperatures in November have delayed the onset of winter heating.
‘Overall, Europe has managed to bring its
natural gas inventories to a rather comfortable level and is now well-protected
to withstand future supply shocks,’says Kar Yong Ang,
Octa analyst. Indeed, according to the latest data from Gas Infrastructure
Europe, gas storage levels are at record highs for this time of the year at
around 94% full, said Octa analyst, adding that the general bias for TTF price
remains bearish. ‘I would not be surprised to see European
natural gas prices drop to €30 per MWh in case of a normal winter.
Alternatively, if this upcoming winter turns out to be colder than normal, we
might see TTF temporarily hitting €60 per MWh.’
However, Kar Yong
Ang says that different kinds of challenges and risks lie ahead for Europe. ‘Some
European states have secured a number of long-term import deals with major LNG
producers, which, on the face of it, is a good thing. But, it appears that
Europe is placing too much faith in LNG. It’s betting too much on a single
supply source, which may backfire in the long run. If Europe is to permanently
replace relatively cheap pipeline imports from Russia with relatively expensive
LNG imports, then, I am afraid, economic activity in its traditional industries
may never recover to the pre-crisis levels, and in fact, deindustrialisation
may kick in full force.’
Indeed, Europe’s
top competitors—the United States and China—benefit from lower prices. The
United States has ample resources at home, while China is getting cheap imports
from Russia. Europe risks losing its competitive standing in the global
marketplace. Furthermore, as we explained at the beginning of the article, the
temporary shutdown of a single LNG export plant in the U.S. has already
highlighted how strongly European energy security is now connected with the
intricacies of the global LNG market.
‘All 27 member states of the EU have been
net importers of energy since 2013, and this status is unlikely to change in
the foreseeable future. With supply options more limited than in the past, European consumers will have to get used to
more volatile natural gas prices, as they will increasingly be determined by
the whims of the weather and by the bargaining power of other LNG importers in
Asia,’ saysKar Yong Ang, Octa analyst.
Europe has survived
the energy crisis and managed to adapt but has done so at the cost of lower
demand and reduced economic activity. Now, Europe will have to learn to
navigate the global LNG trade successfully to secure the most favourable deals.
About
Octa
Octa is an international broker that has been providing online
trading services worldwide since 2011. It offers commission-free access to
financial markets and various services already utilised by clients from 180
countries who have opened more than 42 million trading accounts. Free
educational webinars, articles, and analytical tools they provide help clients
reach their investment goals.
The company is involved in a
comprehensive network of charitable and humanitarian initiatives, including the
improvement of educational infrastructure and short-notice relief projects
supporting local communities.
In the APAC region, Octa captured the
‘Best Forex Broker Malaysia 2022′ and the ‘Best Global Broker Asia 2022′ awards
from Global Banking and Finance Review and International Business Magazine,
respectively.