Natural gas markets in transition, European energy forecast for 2022

Demand, Supply, and Geopolitics

Supply and demand should be able to cope with the current situation. However, geopolitics was again underestimated as Russia’s European gas supplies were aligned with Vladimir Putin’s own agenda. To put enormous pressure on the European gas markets while the global demand for natural gas and LNG was booming was a feat.

Putin’s willingness to press the European governments into defense was not only related to his own ideas about the liberalized gas markets on the European spot market, but also to his regional power politics, the Nordstream2, Belarus and, in recent weeks, his own ideas about the Role of Ukraine. By using its own energy weapon, Moscow was able to take on Europe again, while the former EU member Great Britain also specifically wanted to comply with Putin’s demands.

US shale gas-based LNG flotillas

At the moment, US shale gas-based LNG exports seem to be saving European consumers as prices plummet but are still well above “normal” price levels. The so-called onslaught of “Freedom Gas” has lowered natural gas prices across Europe. With around 44 LNG loads coming to Europe, 24 of which are declared destinations, some relief is expected very soon.

Most of the declared cargoes go to Great Britain (5), France (3) or the Netherlands (3). Others go to Turkey, Malta, Croatia and other places. The latter situation has now resulted in a European market that appears to be more balanced in the short term. LNG deliveries in Asia will also be diverted, while weather forecasts and temperatures are overall positive for natural gas demand.

The current LNG flotilla on its way to Europe is mainly due to the fact that Asian parties are more interested in using their current gas storage volumes and not buying new ones at high prices. Deliveries from Russian natural gas pipelines are also expected to pick up again as Putin pauses his geopolitical power play with NATO and Europe as several meetings between Biden and Putin on the Ukraine conflict are planned in the coming weeks.

The months ahead will be crucial for natural gas markets as the ongoing volatility appears to linger longer. Without real additional strategic decisions by the European governments or the EU Commission, the market will continue to be left to a liberalized market situation with great risks. Since US LNG or Asian LNG diversions will not be enough to support a sustainable situation in 2022, other options need to be considered.

Weather developments

At the same time, the current positive weather developments could change dramatically again very soon and put the markets in the USA, the EU and possibly also in Asia under pressure again. The European gas storage facilities are at a critically low level even with the new US Freedom gas reserves, which leaves no real optimism in the long term. The longer-term view of the European gas supply needs to be reconsidered, as the increasing dependence on Russian pipeline gas volumes will not only endanger the regional economy, but will also lead to negative consumer reactions.

It is not possible to rely on possible increases in renewable energy production, as stated by European governments and the EU Commission, as the vast majority of heat and power generation in Europe still depends on the use of hydrocarbons, which are natural gas the main backbone is. Increased interruptions, as the weather conditions are unpredictable, as has been shown in recent weeks by the lack of wind and sun, forces an even higher consumption of hydrocarbons over a longer period of time.

A possible dependence on US shale gas exports is not a matter of course either, since the USA is not only a growing gas consumer market itself, but also has its sights set on increased exports to Asia. At the same time, US natural gas production or shale gas is in high demand as long as total production does not increase significantly. The European situation will be the most critical right now, especially for 2022-2023. European gas production, which comes mainly from the Dutch gas field Groningen and the North Sea, is dwindling or, as some have even said, has disappeared.

The effects of the end of production in the Groningen gas field have presented NW Europe in particular with a challenge that has not yet been fully assessed. Without Dutch natural gas production, Russia holds the key to the lock, whatever the rest of the way. Full dependence on Russia is clear to some, but politicians seem to have a different glass bowl. The increased emphasis on renewable energies will not alleviate the pain in the next few years, while Germany and Belgium will make the market situation worse if their nuclear power plants are shut down.

The demand for natural gas will continue to rise if Belgium relies on new gas-fired power plants in the future. No LNG exports to Europe will have the ability to suppress a resurgence of Russian natural gas armaments in the next few years. The vast majority of European markets are dependent on gas imports from Russia or the FSU. At the same time, the European gas markets are heading for several other showdowns.

North African gas exports to Algeria are currently hitting a wall as domestic demand increases while overall production is still in its infancy. Turkey, which is seen by some as part of the European market, is also experiencing a strong increase in demand and is struggling with contractual conflicts with its suppliers. Unless Ankara can make long-term contract decisions very soon, Turkey will urgently need new gas supplies and drive prices up again.

With the Asian markets in abundance, largely due to the fact that their governments are willing to pay extremely high prices, there is great attraction in bringing gas to these consumers. Overall, natural gas from the Middle East, Africa or even Russia is to be linked to Asian demand. Russia’s continued pursuit of a significant stake in China’s gas markets is another not to be underestimated issue in European HQs as Moscow cannot increase its overall gas production significantly without difficulty.

As can be seen in recent months, Russian domestic demand has also increased, which could be a recurring feature in the years to come. China and Europe will fight a new gas battle, both of which are laying their futures on Moscow.

In the short term, the global gas market will cool down if Russia is able and willing to remedy the situation. The media genetic US LNG flotilla is also a positive sign, but could make a detour before the European ports if prices are more attractive somewhere. Since natural gas and especially LNG have become a real commodity due to the liberalization of the markets and the frenzy of spot prices, the situation of cheap gas for consumers and industry could still be a long way off.

Without being skeptical about the availability of natural gas or LNG in the future, pricing will be increased over a longer period of time. Consumers have to be prepared for the latter, as liberalization has put the weapons of price movements in the hands of traders, algorithms and geopolitical strategists.

Long term forecast

The prospects for summer 2022 and winter 2022-2023 are mixed. If Europeans and Asians can refill their gas storage tanks normally again in the summer, a more relaxed, but still costly, winter of 2022-2023 is expected. Should the summer supply not be sufficient, however, 2022-2023 could be a very cold winter, as it is to be expected that the temperatures will not only be as mild as they are now. The last 7 out of 10 winters have been much tougher than the current situation.

In addition, the possible re-emergence of King Winter will already put extreme pressure in Europe in the coming months. At the same time, geopolitics, the stepchild of commodity traders and analysts, is still very strong and could be the new cuckoo in the nest of the European energy transition.

Currently, a Russian cuckoo has already displaced several European youngsters while leaving a coal cuckoo. New geopolitical confrontations around the Ukraine, the Baltic States or Belarus, supported by a German NO to Nordstream2, could block summer gas supplies again. Expecting historically low gas prices once again will not come true. In the coming years, hydrocarbon prices are set to rise, especially if the energy transition and lack of upstream investment remain a very toxic cocktail that politicians and activists don’t understand.

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