Crisis only “so far” mastered: Gas prices could double again

Crisis only “so far” mastered
Gas prices could double again

By Nils Kreimeier

The gas storage facilities are full, prices are falling and demand is subdued. But the supposed calm on the energy price front is deceptive. The baptism of fire for European energy policy could still be ahead.

A few days before the official start of spring, Europe experienced a special moment – ​​largely unnoticed: for the first time this year, natural gas storage facilities in the European Union were net refilled – after long weeks in which winter had forced operators to use gas for industry and give up households. It was a moment to breathe easy, a signal after a winter that had begun with the bleakest of forecasts. Russia’s war of aggression against Ukraine and the Kremlin’s extensive halt to gas supplies had fueled fears that Europe’s companies and consumers could collapse under the rising price of fuel. There were even warnings about supply bottlenecks.

None of that happened. Because – and this is the second piece of news: this spring, the EU is not just standing there with more full storage tanks than is usual for this time of year. The prices for natural gas have also fallen to a level that hardly any observer would have thought possible in January. On Monday, the futures contract at the Dutch reference point TTF fell below 40 euros per megawatt hour. That is only about a ninth of the price from the period immediately after the beginning of the war. And the costs for the gas will reach a level like in the summer of 2021, i.e. shortly before the start of the following energy crisis. They are still above the level of the past few years, but the gap is only falling within the range of normal price fluctuations.

The reasons for the fall in prices and the stable situation are now known: the EU and above all Germany, as the largest economy, have switched to other suppliers such as Norway and Qatar, built terminals for the import of liquefied natural gas (LNG) at lightning speed, and saved gas on a large scale and stocked up in the panic months of last summer without regard to cost. It was the “whatever it takes” moment of energy policy, and it had the desired effect. The markets have calmed down, the fear is gone. “A scenario like mid-2022, when Europe bought natural gas like crazy at any price to be prepared for the heating season, will not be repeated,” writes Holger Schmieding, economist at Berenberg Bank, in a current market analysis.

The baptism of fire is yet to come

The scientists at the Bruegel Institute in Brussels praise the EU’s “resolute” reaction, which prevented the worst from happening. “So far, the crisis has been mastered through decisive action, switching to other fuels and quick adjustments,” it says.

But the crucial two words are probably “to date”. The baptism of fire for European energy policy may still be ahead this year. It’s the first year that the EU has essentially gone almost entirely without Russian gas supplies. Germany and other countries are therefore becoming more dependent on LNG supplies and thus also on price fluctuations on the world markets. And one factor plays a decisive role here: will demand from China pick up again, and if so, to what extent?

Almost all market observers are therefore extremely cautious when assessing the situation for the coming winter. The currently comparatively low gas prices could “double” again by the coming year, warns the commodity analysis team at investment bank Goldman Sachs. “We do not expect a sustainable solution to the European energy crisis until 2025,” it says – depending on LNG production capacities , which are currently being built. However, even Goldman Sachs had not foreseen the acute drop in the price of natural gas to this extent; the US bankers had expected 85 rather than 40 euros per megawatt hour for spring 2023.

The analysts of Wood Mackenzie, a consulting group specializing in energy issues, point out a remarkable fact: In view of the high gas prices, European companies had reduced the production of ammonia, a raw material that is used for fertilizer, among other things. According to Wood Mackenzie, however, the gas costs that are now falling again are causing the market to turn and production in Europe becoming profitable again: “We estimate that this could mean ten billion cubic meters of additional demand if the factories ramp up production again .”

So the current situation is only partly reassuring. Storage facilities are full, prices are falling and demand is subdued. But as long as the energy markets in Europe are not completely transformed, stability is deceptive. And the next winter will definitely come.

The article first appeared at Capital.de.

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