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):
These 3 actors can react differently according to the market situation. This is what we witness at the moment:
2.What is happening on the gas supply side?
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.
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.
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 14th 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 30th.
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.
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