Fears of a black winter in 2023 seem to have vanished before reaching the European continent. This seemed almost impossible in October, when the European Commissioner for Crisis Management, Janez Lenarčič, assured that the Community Executive was preparing for the worst scenarios, including widespread blackouts. With reserves rising above 82% (compared to a historical average of 70%), warm temperatures at least 7% above the average for the last ten years and consumption that has accumulated five months of decline, with a decrease additional 12% in December according to data from Morgan Stanley, the specter of high prices and supply cuts seems to have receded, at least temporarily.
The perfect combination of factors means that the price of hydrocarbons in the Dutch market, still the benchmark in Europe, has fallen to 60 euros per megawatt-hour, a level similar to what it was before the start of the war in Ukraine.
But the B side of this good fortune may be just around the corner. “Market conditions exist that could cause another price increase during the summer months this year,” he told Five days Norbert Rucker, head of economics at the Swiss bank Julius Baer.
Pedro Cantuel, an analyst at IGNIS Energía, estimates that the current moderation could be affected by two major factors, in addition to the current temperatures. “The gas market injection season will begin in April, a period in which all efforts will be focused on reaching the following winter with an adequate level of reserves. Until September, industrial demand and supply levels by gas pipeline and ship will determine the evolution of reserves and price levels”, he highlights in conversation with this newspaper
numbers in red
The President of the European Commission, Ursula von der Leyen, recognized at the end of 2022 the challenge that the Twenty-seven had for the future. “We know that 2023 will be more difficult and we may face a potential deficit of almost 30,000 million cubic meters next year”. This insufficiency, which represents 7% of the total demand forecast for this year, may arrive as early as next summerestimates in a recent report the International Energy Agency
For now, the worst scenario has not arrived. Although Russia’s gas supply in the first week of the year was less than a third of what it was a year ago, the Kremlin has not yet definitively turned off the tap on Europe. The problem is that it seems unlikely that EU countries will expect larger shipments from Moscow, which in 2022 accounted for 18% of European imports.
The sabotage, still under investigation, of the Nordstream I and II gas pipelines, through which the community bloc could receive 14% of its total consumption in 2021, puts more pressure on shipments of liquefied natural gas (LNG).
Infrastructure
enlarge photoPart of the European commitment to fill this gap is precisely the start-up of new LNG regasification terminals, as well as the restoration of all the supports that did not work last year.
Investments by national governments allowed gas import capacity to increase by 5% in 2022, and an additional 12% is expected in 2023, according to data from the Bruegel study center. Most of the infrastructure to be commissioned is LNG regasification plants, which depend on the ability of governments and companies to attract ships to their shores in a highly competitive international market.
Rucker remains optimistic that these new investments will be accompanied by the solution of the (unforeseen) problems suffered by the European infrastructure in the last year. “The crisis in Europe can disappear as fast as it came because its roots are cyclical and not structural. The combination of last year, especially the energy shortage in China, the nuclear problems in France and the impact of the war in Ukraine was exceptional and cannot be repeated, ”he affirms to CincoDías.
Nuclear generation in France already reaches 73% of installed capacity, far from the meager 40% to which it sank in August last year. This led the French country to require large imports from Germany and the United Kingdom, increasing tension on the continent. The greater availability of the 56 reactors would increase generation by 16%, estimates the S&P Global agency. At the local level, Spain lived in 2022 “the worst hydraulic year in decades”, according to the Minister of Ecological Transition, Teresa Ribera. This increased Spain’s dependence on combined cycle plants and increased pressure on gas.
However, the good news is more cautious on the other side of the Atlantic. The Freeport LNG plant, located in the city of Houston, remains closed since its explosion (still under investigation) last summer. The authorities originally planned to resume operations in November of last year, but the market estimates that there are “several more months” until this becomes a reality. Its impact is not minor: Freeport represents 15% of the US LNG export capacity, central to the new European energy mix. In addition, it blocks the possibility for Europe to benefit from the growth in US production, which the local regulator estimates at more than 3% by 2023.
Volatility
The other part of the response from Brussels corresponds to changes in the shape of the European gas market. Brussels plans to implement three major changes only during the first quarter: the implementation of the controversial cap on the price of gas, the start of joint purchases for a minimum of 15% of its reserves and a new price index that will displace the TTF to the LNG. Brussels hopes with this trio of measures to have greater control capacity and thus avoid competition between the Twenty-seven, a common scenario this year.
The fear of analysts is that the implementation of the changes in the political and regulatory context, as well as the events on the battlefront, could generate another summer of high prices. The future values of the TTF index reached its maximum point of 311 euros MWh on August 25235% above the average values at the end of the year.
For now, gas deliveries in the TTF futures market for the summer are trading just 4.7% above the reference value. However, this is not necessarily an indicator of relevance. Miguel Gil Tertre, head of the Economic Analysis unit of the European Commission’s Energy Department, is skeptical about the impact of this low differential for the summer. “Futures prices have proven to be consistently incorrect over the last 15 months to forecast future prices”, he assures on his Twitter account.
Indeed, the values of the futures market do not match the expectations of analysts, who see values above 100 euros. But the real fear has to do with last year’s strong volatility continuing. The variation in gas prices in the TTF market was slightly higher than 6% throughout 2022, both towards rising and falling values. This is in stark contrast to Brent barrels, whose variation was limited to a third, 2%.
For the next few months, “the greatest volatility is expected on the supply sideand could be affected by expectations of a shortage in the LNG supply and, therefore, of fewer natural gas reserves than expected”, explains Cautel.
Consumption
2022 has confirmed that black swans, fortuitous events that cause surprise, exist. “2022 has been one of the five warmest years on record and is a reminder of the risks of climate change and its impact on weather patterns”, says a commodity forecast from Swiss bank UBS. Nothing prevents us from thinking that the high temperatures that today make the Twenty-seven happy will become a serious problem in the summer season.
The use of electricity to air condition buildings is on the rise and has increased by 212% in the last decade on the continent, according to data from the European Commission. This puts governments before the double challenge of filling gas tanks for the following winter while the demand for electricity generation remains high.
In the last summer, 33% of electricity generation in Spain was produced from gas, according to data from July to September from Red Eléctrica. In contrast, in the same period of 2021 the level was limited to 21% and in 2020 to 25%. In particular, the European Environment Agency (EEA) highlights that Spain and Portugal, like Greece and Italy, are the countries most affected by frequent heat waves and high electricity prices. In these countries, households could consume 71% of their total average annual energy use in cooling.
That domestic consumption continue at moderate levels, as well as security of supplies, is essential to prevent an increase in industrial demand from skyrocketing. The attitude of households together with the optimism of the markets and the caution of regulators can definitely leave fears behind.
