Recently, the rapid development of natural gas in Europe has attracted the attention of all parties. As of January 18, European natural gas *** to 278 euros megawatt hours, compared to the high of around 345 euros in the third quarter of 2022 after the geopolitical conflict**, a decrease of more than 90%. The key factors for the decline in natural gas in Europe are the short-term mismatch between supply and demand and the change in the energy mix in the medium and long term.
A factory of CF Industries in the United States photographed in Cheshire, England. Photo by Jon Humper (Xinhua News Agency) In the short term, Europe is in a comfort zone of natural gas supply and demand, which has rarely been seen in recent years.
On the demand side, the economic downturn has led to a significant decline in European natural gas demand. In 2023, the European economy as a whole will be relatively weak. Judging from recent data, the economic trend of the euro area showed a clear trend of first rising and then declining, with a year-on-year increase of 12%, a year-on-year increase of 05%, a year-on-year increase of 01%。The European Central Bank's recent statement also shows that the eurozone economy in the fourth quarter is not optimistic, and it is very likely that it will still be in a state of stagnation or slight recession. It is worth noting that the GDP of Germany, the locomotive of the European economy, will decrease by 0 in 2023 compared with 20223%。This series of data suggests that the European economy is stalling after the first quarter of 2023. As a result, Europe's demand for natural gas has been declining. Eurozone gas demand fell 7% in 2023 compared to 2022 and 16% from the average between 2017 and 2021, according to ING statistics, highlighting the impact of sluggish economic activity on natural gas**.
The sluggish demand is evident not only in the European manufacturing and industrial sectors, but also in the power and energy sectors. In 2023, the scale of electricity energy production in the eurozone will decline further, while some electricity** will be diverted to renewable energy. As a result, the data shows that the spread between electricity and gas prices in the eurozone has been in negative territory for a long time, even during the heating season. Therefore, the general downturn in demand, whether in the European manufacturing sector or the power and energy sector, is the key to the continued decline in gas prices in 2023.
On the supply and inventory side, although the global natural gas market has been hit by the geopolitical situation in the Middle East and the disruption of shipping recently, the relatively high inventory level in Europe is undoubtedly another key factor in suppressing gas prices.
In 2023, in order to cope with the potential peak of winter gas consumption in Europe, EU institutions will strengthen natural gas supply throughout the year and focus on increasing winter inventory levels. At the beginning of the 2023 24 heating season, the eurozone gas inventories basically reached the level of 100%, entering the heating season in the best condition. By early January, European gas inventories remained high, at 86%. It is expected that if there is no additional surge in demand or shocks in the future, Europe's natural gas reserves will remain at around 50% at the end of the heating season, higher than the average of the previous year. This high inventory situation has undoubtedly significantly alleviated Europe's previous concerns about gas shortages, and it also means that European gas prices have limited space in the short term.
Although the recent tensions in the Red Sea have caused global liquefied natural gas (LNG) shipments to be blocked, and QatarEnergy, Europe's main natural gas supplier, has stopped tankers from passing through the Red Sea, there are still alternate bypass routes to provide LNG to Europe. At the same time, the United States has replaced Qatar as the largest LNG exporter in the European LNG supply structure. Therefore, the change in the situation in the Red Sea did not have an excessive impact on European gas supplies.
German economic data, the economic slowdown data released by the ECB executives, and the European gas inventory data became the key factors that weighed on gas prices. At the same time, recent statements by major central banks on the pace of interest rate cuts have also poured cold water on commodity markets. Expectations of interest rate cuts have cooled and postponed, exacerbating the decline in natural gas**.
In fact, from the perspective of supply and demand fundamentals, the European natural gas market will still face the highest pressure in 2024. According to the relevant institutions**, the sluggish demand for natural gas in Europe will continue in the first quarter of 2024, down about 15% from the average of the past five years. Although there is a consensus that natural gas demand in the eurozone will pick up in the second quarter, the overall recovery will be limited. On the supply side, the world's new LNG export capacity will be limited in 2023; In 2024, affected by the increase in LNG export capacity in the United States, the new LNG supply in the global market will increase by 525% compared with 2023, of which a large number of exports will be targeted at the European market.
It is worth noting that the recent volatility of the European natural gas market is not only a manifestation of the short-term supply and demand situation and financial environment, but also the result of medium- and long-term changes in the European energy structure.
On the one hand, the supply of LNG in Europe's energy mix is rising rapidly. In 2021, before the outbreak of the Russia-Ukraine conflict, pipeline gas accounted for 44% of Europe's natural gas imports, and LNG supply accounted for about 20%. After the outbreak of the Russia-Ukraine conflict in 2022, Europe pushed for a shift in natural gas**, and the scale of pipeline gas fell sharply, compared to Europe's greater reliance on Nordic pipeline gas**. Norway's share of Europe's energy supply increased from 26% in 2021 to 31% in 2023, while the share of Russian pipeline gas in Europe's gas supply fell to 7%. At the same time, Europe's natural gas supply has shifted to LNG-based, with LNG's share of Europe's total natural gas supply rising from an average of 20% in the first 20 years of the 21st century to 53% in 2023.
On the other hand, the supply of renewable energy in Europe is accelerating. In the EU RepowerEU plan, to reduce dependence on fossil fuels in Russia, on the one hand, to strengthen energy substitution import channels, on the other hand, to accelerate the construction of renewable energy and low-carbon economic development. In line with the EU Renewable Energy Directive, the share of renewable energy in total final energy consumption in the EU will be increased from the current 32% to 42% by 20305%。This means that the share of renewables in the EU's overall energy supply will double. The rapid increase in renewable energy is undoubtedly another medium- and long-term factor influencing the decline in fossil energy demand in Europe.
Therefore, the recent volatility in the European natural gas market is the result of a combination of short-term supply and demand dynamics and medium- and long-term changes in the energy mix. Undoubtedly, if you look at it from the point of view of getting out of the dilemma of energy shortages after the Russia-Ukraine conflict, European energy policy is effective. However, if we start from the original intention of Europe's energy structure to adjust the energy structure by improving energy independence, the current market situation is worth rethinking.
Another medium- and long-term trend in the transformation of Europe's energy structure is the increasing dependence of Europe on US energy. After the outbreak of the Russia-Ukraine conflict, Europe is desperately seeking an alternative supply of natural gas. Due to the high cost of LNG transportation and the geographical advantage of the United States, and compared with Australia and Qatar, the United States is more dependent on spot LNG exports, and the United States has become the main party in Europe's new natural gas architecture. Europe's dependence on U.S. natural gas is expected to further strengthen as new U.S. export capacity comes into operation in the future and more regasification terminals are used in Europe.
Therefore, although there is enough "gas" in the short term, Europe still has a long way to go to achieve real security and independence of energy supply, and the rapid development of its own renewable energy is the key.
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Process edit: u060