Supply fears weigh on European energy markets.
Supply fears are weighing on European energy markets just as the winter heating season begins. Gas prices in Europe have exceeded 45 euros per MWh and have driven the entire market, including electricity prices, upwards.
Many events fuel uncertainty and anxiety. The famous “Dunkelflaute” has reigned over northwest Europe for the past two weeks. Electricity generation from renewables has been low and thermal generation, particularly gas-fired power plants, has made up the deficit. The onset of cold weather increased the demand for heating, which increased total gas consumption. Storage levels started dropping a little earlier and faster than expected.
The liquefied natural gas (LNG) boom is gaining momentum.
Separately, Russia has cut off gas deliveries to Austria due to an ongoing dispute over payments and compensation. Austria prepared for this event in advance, and Russian gas continues to be delivered to Eastern Europe in unchanged volumes. The cessation of sales therefore does not modify Europe's security of supply.
Looking ahead, the market expects that the transit agreement between Ukraine and Russia will be terminated towards the end of the year. Russian gas deliveries will likely only reach Europe via the Black Sea route soon.
Is gas supply under threat? This is unlikely. The consensus is that we should not fear an unusual seasonal deficit for several reasons: wind conditions have already returned to more normal levels. Gas demand from power plants and industries remains at structurally lower levels.
Overseas liquefied natural gas (LNG) imports are expected to resume when terminals in Qatar and the United States return from their October maintenance periods. Today's high prices will likely attract additional cargoes to European shores, in addition to contracted supplies. More importantly, the liquefied natural gas (LNG) boom is gaining momentum. Despite some delays, three new projects are set to come online by the end of the northern hemisphere winter.
Given the current abundance of gas inventories and the balance of fundamental trends, current prices appear excessive. That said, in the past we have underestimated the continued willingness of European and Asian buyers to pay for gas. Delays in commissioning new export terminals, increased maintenance and a marginal increase in LNG purchases were enough to prevent an early shift to excess global supplies. We have raised our short-term forecast for European prices to 35 euros per MWh, but we remain on our bearish stance.
