What’s Impacting Europe’s Gas Prices a Year Since the Russia-Ukraine War?

Even before Russia invaded Ukraine nearly a year ago, natural gas prices in Europe had risen to record levels.

The Dutch TTF Natural Gas Futures had increased as a result of lower gas supply from Russia, rising energy demand as economies recovered from COVID-19 and subpar performance of the renewable energy sector.

After Russia invaded Ukraine, the natural gas benchmark touched an all-time high of €345/MWh on March 7, 2022.

However, the prices gradually retreated and remained steady despite Russian gas producer Gazprom starting to cut supplies to European countries such as Poland, Bulgaria and The Netherlands.

In July 2022, the price again began to rise, hovering around €135/MWh.

After Russia further curtailed its gas supply via the Nord Stream pipeline from 100 million cubic meters in mid-June to 33 million cubic meters per day, the prices surpassed €200/MWh by mid-August. After touching a fresh high of €346.52/MWh on August 26, European natural gas prices gradually dropped.

Also read: Russia-Ukraine War’s Effects On The Oil And Gas Industry

Imports and Inventories

European natural gas prices have been declining since then as fears of supply shortages for the winter eased after European nations met their storage level targets earlier than expected.

After the European Union (EU) decided to end the one-sided energy dependency on Russian pipeline gas, gas imports from Norway as well as The Netherlands, Belgium, and the United States in the form of LNG improved.

The gas storage levels in most EU countries are around 90%, which is well above their five-year averages.

However, Russia still delivered 60 billion cubic meters of natural gas to the EU over the year (around half of the contracted volume of the year), which is going to be a major factor while restocking the inventories for the next winter.

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A Not-So-Cold Winter in Europe

A major factor contributing to this downward price movement and higher storage is the unusually mild weather at the start of Europe’s winter.

Lower demand in Europe due to warmer-than-usual winter along with lower energy use in response to higher bills have helped achieve strong inventory levels.

There could be some supply threats to European natural gas prices despite the impressive progress in 2022 by reducing its reliance on Russian gas supplies and making sure it had enough gas in storage.

Uncertainties prevail as Russian gas deliveries could be considerably lower in 2023 with the possibility of a complete stoppage of the supply which could create an even bigger gap in European and global gas supplies.

Another important factor is China and how the COVID-19 wave there will affect the economy and the demand for gas in Europe. Europe was able to fill the reserves last year partly because demand for LNG in China was low.

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Impacting Factors in 2023

However, China National Offshore Oil Corp has forecast that China's natural gas imports will be 7% higher in 2023. This additional demand could test Europe's efforts to bring in more cargo, as buyers work to restock inventories for the next winter without Russian imports.

Also, there is no guarantee that Europe’s mild winter will continue. As a result of these factors, the EU could face a shortage of 30 billion cubic meters of natural gas in 2023.

The price ceiling was accepted by EU members as a strategy to reduce Russia's influence over the EU gas market. The cap would be triggered if the month-ahead Title Transfer Facility (TTF) contract moves over €180/MWh for three consecutive business days. The gas price cap, if and when activated, would be in place for at least 20 days.

But the EU’s decision to cap gas prices could jeopardize the bloc's efforts to refill storage inventories this summer as the price cap would allow Asian buyers such as China and India to become more competitive in the spot market.

Europe may need to take some urgent measures to accelerate energy efficiency improvements in order to reduce this supply deficit. As part of these energy efficiency measures, companies and homes can be assisted in becoming more energy efficient, along with the adoption of high-efficiency equipment and lights.

To speed up the deployment of renewable energy installations, governments can include stronger investor incentives and cut the time it takes for projects to be approved. Behavioral changes such as turning down thermostats could also save the EU an extra 5 billion cubic meters of gas in 2023.

Learn how GEP helps oil and gas companies improve their procurement and supply chain operations

Author: Subodh Kapadnis