Gas demand across Europe- what are the trends and the impact on the gas prices ?

All eyes are on gas supply since the beginning on the war between Russia and Ukraine.

European gas prices were recently trading above the €300/MWh mark for delivery until the end of the upcoming winter period, mainly supported by the negative events impacting the supply side such as the non-restart of Nordstream 1 and the extension of the Freeport LNG outage.

On top, the demand for electricity production was higher during the summer due to poor hydro, wind and nuclear generation on the back of warm, dry and calm weather.

But the gas market is moving towards a new direction where total demand evolution linked to the economic situation, gas stocks fulness expectations and EU decisions play a central role- Let’s zoom in.

1.How is the total gas demand structured in EU + UK?

The total gas demand is split in 3 types of actors (2021 figures):

• Large industrial users connected to the transport grid for 20 %
• Residential & Commercial users as well small industrial players connected to the distribution grid sector for 62 %
• CCGT (combined cycle gas turbines- for power generation) for 18 %
• How is the total gas demand evolving?

These 3 actors can react differently according to the market situation. This is what we witness at the moment:

• Industrial sector: Is very much linked to energy prices and the macroeconomic context. They adapt their production and gas consumption mainly according to market prices and downstream demand. We have seen a gas demand reduction (or destruction) since September 2021 with the energy prices increase and we expect this downward trend to intensify in 2022 and to continue throughout 2023. Note that potential government support to help energy-intensive industries may also impact total gas demand reduction in this sector.

• Residential & Commercial sector: Is linked to temperatures, prices and regulations. We have seen already a reduction (or destruction) of the demand linked to prices (temperature effect excluded). The introduction of some organized energy savings measures (such as limit heating to 19°C this winter) will intensified this effect. We expect the demand to continue its downward trend (even when the temperature will get lower) in 2022 and 2023 but significant discrepancies may appear among European countries, depending on local measures to reduce consumption and/or direct subsidies to ease the financial burden for end users.

• CCGT sector: gas-fired electricity generation: Is very much linked to the total electricity demand and the availability of all other ways to produce electricity as renewable, nuclear, hydro, coal…If the power generation is lower in the others production assets (as low wind or solar production or low hydro) the demand of this actor will increase to compensate the others and answer the total electricity demand. This is exactly the situation we have been witnessing this summer with warm temperatures – high electricity demand (air-conditioning) and low hydro and nuclear production.We expect gas demand for power generation to remain strong in 2022 but a probable decrease of the electricity demand may cap the upside.

2.What is happening on the gas supply side?

• Pipeline

The main uncertainty on the supply side remains of course the fate of remaining Russian pipeline gas exports to Europe (through Ukraine and Turkstream) following the non-restart of Nordstream 1 pipeline. Note that a maximization of Norwegian pipeline gas exports to Europe also provided some relief but to a much lesser extent than LNG supply.

• LNG

European LNG imports reached record high levels in the first eight months of the year and we expect them to continue to be comfortable as TTF prices trade much higher than Asian spot LNG prices since the beginning of the year and the forward curves continues to price a huge premium for Europe.

• Stocks

Despite the plunge in Russian gas exports to Europe, European gas stock levels are in line with historical average levels around 85% of fullness rate by mid-September, 5 percentage points above the EU target schedule set at 80% fullness rate on November 1st. This could reduce injection demand in the coming weeks compared to initial assumptions.

3. What are the EU decisions and what is their impact?

The State of the Union address performed by the EC President on September 14^th did not contain specific proposals to cap wholesale gas prices nor limit the price for gas-fired power generation. Nevertheless, the EC would like Member States to reduce peak power demand, which could limit the upside in gas demand for power generation if implemented.

A windfall tax on profits for non-gas power generators and a solidarity contribution from fossil fuels producers is expected to contribute to the financing of measures to help retail and industrial users cope with surging energy bills.

Note that the final vote of the EU Energy Council on the EC proposals is planned on September 30^th.

5. How will the balance demand & supply evolve and what would be the impact on the gas prices? 

Overall, the EC proposals did not point towards coordinated measures or binding targets to reduce gas demand at this stage, which may explain the rebound in wholesale gas prices in week 37. But the EC is expected to release demand reduction targets for each Member State by the end of October.

We expect the observed level of demand reduction from households as well as the availability of LNG supply (notably from the US) to be the main drivers of European gas prices in the coming weeks. The availability of French nuclear plants, the level of renewable power generation and the temperatures anomalies should also play a key role.

To conclude, the evolution of the gas demand but also the level of non-gas-fired power generation will be the main factors impacting the gas prices for the upcoming months.