Natural Gas Markets in Flux, European Energy Prediction for 2022

The so-called energy crunch scenarios as shown in Europe and Asia have pushed not only natural gas prices, but also electricity prices and inflation up. The discussion on where the real fundamental issues of the current crisis are is still ongoing, but the role of intermittency as energy transition has been pushing renewables, a mismatch between natural gas storage and demand in major markets, and the weaponization of commodities by major players, have been indicated as being behind the ongoing crisis.

Europe vs. Russia

For European countries, including the UK, the weaponization by Russia of its natural gas strategies has come as a cold shower. A clear mismatch or outright failure of European governments to understand the risks of energy transition while relying on liberalized energy markets, in which commercial parties are expected to deal with demand-supply issues, while at the same time commodity traders are left to mitigate volumes, contracts and risks, has been shown to be a disaster.

Even that COVID-19 has had its impact, the overall strong recovery and growth of global economies and the linked demand for energy supplies, seems to have taken markets by surprise. The latter is to say the least very strange, if taking into account the strong commodity trading sectors, mainstream natural gas producers and increased availability of gas storages around the world.

Demand, supply and geopolitics

Demand and supply should have been able to deal with the current situation. However, geopolitics has been underestimated again, as Russia’s European gas supplies have been tweaked to Vladimir Putin’s own agenda. By putting extreme pressure on European gas markets, while global demand for natural gas and LNG was booming, was a masterstroke.

Putin’s willingness to push European governments into the defense was not only linked to his own ideas about the European liberalized spot market based gas markets, but also to his regional power politics, involving Nordstream2, Belarus and the last weeks his own ideas about the role of Ukraine. By putting his own energy weapon in place, Moscow has been again able to take on Europe as a whole, while former-EU member UK also was targeted to comply to Putin’s demands.

US shale gas-based LNG flotillas

At present, US shale gas based LNG exports seem to come to the rescue of European consumers, as prices are plunging, but still are way above “normal” price levels. The so-called onslaught of “Freedom Gas”, has brought natural gas price levels European-wide down. With around 44 LNG cargoes coming to Europe, of which 24 have declared destinations, some relief is expected very soon.

Most of the declared cargoes are heading for the UK (5), France (3) or Netherlands (3). Others are going to Turkey, Malta, Croatia and other places. The latter situation has now resulted in an European market that seems to be more balanced in the short term. LNG supplies in Asia are also being redirected, while weather forecasts and temperatures overall are positive for natural gas demand.

The current LNG flotilla heading to Europe is mainly caused by the fact that Asian parties are more interested to use their current gas storage volumes, and not to buy new ones at high price settings. Russian natural gas pipeline supplies are also expected to increase again, as Putin is taking a break in his geopolitical power play with NATO and Europe, as the coming weeks several meetings between Biden and Putin are planned with regards to the Ukraine conflict.

The coming months will be crucial to natural gas markets as the ongoing volatility seems to stay for longer. Without any real additional strategic decisions made by European governments or the EU Commission, the market is still left to a liberalized market situation in which risks are major. As the US LNG or Asian LNG diversions will not be enough to support a sustainable situation during 2022, other options need to be taken onboard.

Weather developments

At the same time, current positive weather developments could change again dramatically very soon, putting additional new pressure on markets in the USA, EU and possibly Asia. European gas storages, even with the new US Freedom Gas supplies, are at a critical low level, not giving any real room for optimism in the long term. Looking longer-term European gas supplies are to be reassessed, as the growing dependence on Russian pipeline gas volumes is putting not only the regional economies at risks, but also will lead to negative consumer reactions.

To rely on possible renewable energy generation increases, as stated by European governments and the EU Commission, is not feasible, as the overwhelming majority of heat and power generation in Europe still depends on hydrocarbon usage, in which natural gas is the main backbone. Increased intermittency, as weather conditions are unpredictable as shown the last weeks by the lack of wind and solar, forces even higher usage of hydrocarbons for longer.

Possible reliance on US shale gas exports is also not to be taken for granted, as the US is not only a growing gas consumer market itself, but also has its eyes on increased exports to Asia. At the same time, US natural gas production, or shale gas, will be in stark demand, as long as overall production is still not substantially increasing. The European situation will be the most critical at present, especially for 2022-2023. European gas production, which was largely Dutch Groningen gas field and North Sea production is dwindling, or as some even stated, has disappeared.

The effects of the end of Groningen gas field production has presented especially NW Europe with a fait a compli that has not been assessed to its fullest yet. Without the Dutch natural gas production, Russia is holding the key to the castle, whatever the rest is doing. Full scale dependency on Russia is clear to some, but politicians seem to be having a different glass bowl. Increased emphasize on renewables will not be taking the pain away the next years, while Germany and Belgium are even making market situation even worse, if their nuclear power plants are being shut down.

Demand for natural gas will even increase even more if Belgium will take the road for new gas-fired power plants in the future. No LNG exports to Europe will be having the option to quell any resurgence of Russia’s natural gas weaponization the next years. The overwhelming majority of European markets are dependent on Russian or FSU gas imports. At the same time, Europe’s gas markets are heading for several other showdowns.

North African gas export Algeria is hitting a brick wall at present, as its own domestic demand is up, while overall production is fledgling. Turkey, some consider it to be part of the European market, is also showing a strong demand increase, while battling contract conflicts with its suppliers. If Ankara is not able to reach long-term contract decisions very soon, Turkey will be in dire need for new gas supplies, pushing prices even up higher again.

With Asian markets amply supplied, mainly due to the fact that their governments are willing to pay extremely high prices, the attraction to bring gas to these consumers is high. Overall Middle Eastern, African or even Russian natural gas is going to be linked to Asian demand. Russia’s ongoing quest to take a major stake in Chinese gas markets is another issue not to be underestimated in European HQs, as Moscow is not able to increase its overall gas production substantially without difficulties.

As seen the last months, Russian domestic demand is also up, which could be a reoccurring feature for the coming years. China and Europe will be fighting a new gas battle is both put their future on Moscow.

Short-term, global gas markets are cooling down, if Russia is able and willing to bring relief. The media-genic US LNG flotilla is a positive sign too, but could be before even hitting European ports make a detour if prices somewhere are more attractive. As natural gas, and especially LNG, have become a real commodity, due to liberalization of markets and spot-price frenzies, the situation of cheap gas for consumers and industry could be still a long way.

Without being skeptical about the availability of natural gas or LNG in future, price settings will be higher for a prolonged period of time. Consumers will need to adjust to the latter, as liberalization has put the weapons for price movements in the hands of traders, algorithms and geopolitical strategists.

Long term prediction

For Summer 2022 and Winter 2022-2023 the outlook is mixed. If Europeans and Asians are able to refill their gas storages to normal levels during the summer period, a more relaxed but still costly winter 2022-2023 is expected. If summer replenishment is however not enough, 2022-2023 could be a very cold winter, as it can be expected that temperatures are not only as mild as at present. The last 7 out 10 winters were much harsher than the current situation.

Additionally, possible re-emergence of King Winter will be bringing already extreme pressure in Europe 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 European Energy Transition nest.

At present a Russian cuckoo has already pushed out several European young birds, while leaving a Coal Cuckoo. New geopolitical confrontations around Ukraine, Baltic or Belarus, supported by a German NO to Nordstream2, could block summer gas deliveries again. To expect historical low gas prices again will be a wish not to come true. Coming years, hydrocarbon prices will be rising, especially if energy transition and lack of upstream investments stay to be a very toxic cocktail, not understood by politicians and activists.