After Russia’s invasion of Ukraine, the energy crisis and unimaginable costs in fuel prices have been the dominant narrative in Europe.
However, the plunge in natural gas prices, and the de-escalation of oil prices from triple digits, combined with high storage rates in Europe eased concerns. Optimism was further boosted by the mild winter and alternative fuel supply routes. This winter turned out to be the second warmest in a decade, and European gas prices, which have fallen by 37% since November, have allowed Europe to build up a sizable stockpile of fuel.
The strength in unity
At the same time, as the Bruegel think tank underlines, the energy crisis that began in 2022 reminded European governments of the resilience provided by the relatively well-integrated European electricity markets, which have been painstakingly created over several decades. European Union leaders have thus decided to reverse a creeping energy renationalisation and invest in the completion of the internal market.
However, there are some signs that this momentum is being lost, as different EU capitals learn different lessons from the energy crisis, at a time of unprecedented investment needs in generation and networks across the EU.
A mixture of uncertainty
This combined with geopolitical instability in key -energy-regions of the planet such as the Middle East and the Red Sea sustains concerns that the energy risk is not over for Europe.
“While the fall in natural gas prices may give the impression that Europe has solved its energy crisis, we believe that the crisis is not over yet and we have one more winter to go before we fully eliminate the risk of a recurrence of extreme natural gas prices. of gas” characteristically wrote strategic analysts of Goldman Sachs in their recent note.
In their view, improvements in short-term LNG supply have not resolved the structural deficit and import losses from Russia. Prices in turn remain vulnerable to supply disruptions or demand fluctuations.
The fall in prices
However, energy prices in the EU continued to fall. Natural gas prices were recently on par with fall 2018 and the lowest since June 2023. Electricity prices were also more than 60% lower in December 2023 than a year earlier. And industrial production in the eurozone is picking up again.
In particular, the much-quoted Dutch natural gas TTF prices fell again and, at €25.75 per megawatt hour, were at their lowest level since June 2023. The short peak between July 2021 and March 2023 therefore appears to have finally pass. Therefore, natural gas prices are currently returning to the level seen in the fall of 2018.
And although wholesale electricity prices are still high due to significant irregularities in the distribution of prices in Europe, the minimum electricity price in the EU was just €15.80 per MWh in September 2023, for example the lowest level from December 2020.
Comparing December 2022 with December 2023 even shows that electricity prices have fallen by more than 60% compared to the same month of the previous year.
With an eye on… the weather
Analysts say European gas “still has another winter ahead of it”, as cold weather could trigger a surge in demand, which in turn could deplete inventories and push prices higher.
Weather-dependent heating, they note, covers more than 60% of consumer demand.
According to their estimates, a winter that is one standard deviation colder – about 1°C below average – could increase demand by about 12% of storage capacity.
Goldman Sachs highlights that storage is above seasonal norms, which provides comfort ahead of the summer, but the bet on next winter is yet to be decided.
The pivotal role of LNG
“Not only has Europe failed to fully compensate for the roughly 20% of lost supply it is no longer receiving from Russia, but at the same time many of the recent declines in LNG prices have come from demand destruction rather than additional supply,” they estimate. Goldman Sachs analysts.
They predict, however, that in the medium term, new LNG export projects could come online in 2025, which will lead to an increase in global LNG supply and start to drive markets into oversupply.
“With significantly more LNG available, Europe will no longer need to crowd out price-sensitive buyers in the rest of the world to guarantee sufficient imports and will be able to meet rising domestic demand, leading to consistently lower LNG and European prices of gas” they emphasize. If this happens, the winter of 2025-2026 will record a “comfortable supply backdrop”.
However, GlobalData analyst Ravindra Puranik warns that the energy crisis could repeat itself: “There is a possibility that the crisis will re-emerge in 2024 if the winter proves severe and Europe’s suppliers are affected by geopolitical tensions or other issues.”
Possibility of future crises
The delicate balance of supply and demand can be upset by unexpectedly cold weather (creating a spike in demand) or by sudden reductions in supply availability caused by geopolitical tensions in supply areas.
“Being heavily dependent on imports, Europe’s energy security is at the mercy of other markets that may or may not prove to be reliable supply partners,” says Puranik, explaining how other regions could trigger a European crisis.
Returns the geopolitical risk premium
Another parameter that causes concerns for Europe’s energy sufficiency is the crisis in the Red Sea, with the ongoing attacks by the Houthis, which cut off one of the world’s main trade arteries, creating yet another choke point for energy shipments towards the Europe.
Tankers carrying liquefied natural gas – which is supercooled to travel by ship rather than by pipeline – regularly pass through the Red Sea and several shipments to Italy have already been cancelled.
Security concerns have led shipping and some energy companies to reroute ships around the southern tip of Africa instead of through the Suez Canal to the northern tip of the Red Sea. This lengthens the journey to Europe from suppliers in the Middle East, such as Qatar, by a week or more and increases costs.
About 70% of LNG shipments from Qatar bound for Italy’s main terminal in the Adriatic Sea were canceled in January. Last year, Qatar supplied 40% of Italy’s LNG.
Last year, 12.9% of Europe’s LNG passed through the Red Sea from suppliers in the Middle East, mainly Qatar. That means “an extended shutdown of the Red Sea route from the Middle East poses a supply risk to Europe,” said Kaushal Ramesh, vice president of Rystad Energy.
Meanwhile, pipeline gas is still flowing from Norway and Azerbaijan, and Europe is buying some LNG from Russia despite the sanctions.
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