A nightmarish month for natural gas (and how Europe averted a natural gas disaster)
by Scott McKnight, PhD
The top-line
Natural gas prices have fallen 25% in January
Europe has largely averted its gas crisis through a range of responses
The LNG market stepped up big, but may be running out of steam
Nothing kills high prices like high prices. That old cliché is at work again, this time in the natural gas market, which took a drubbing in January. Natural gas prices are now back to lows last seen in May 2021, with Europe—the continent that was supposed to be freezing in the dark through the winter with Russian natural gas cut off—well, Europe’s natural gas prices have fallen 25% in January alone. In a way, the natural gas price plunge is just catching up with what oil prices have done in a bumpier and less flashy way since summer 2022.
Natural gas Henry Hub, February 2022-late January 2022
Natural gas supply now seems firmly in excess of demand—something unimaginable several months earlier. In 2022, the 27-nation bloc that make up the European Union burned about 12% less natural gas compared to the 412 billion cubic metres (bcm) it consumed in 2021, according to the European Commission. And this came while also building up gas inventories amid disaster-case scenario planning. At 77% at the end of January, inventories across Europe are unusually high, well above the five-year average.
How Europe averted the gas crisis?
So, how? A milder-than-usual winter helped, as a good portion of gas in Europe goes to heating homes. Another was Europeans finding other ways to ease the energy pain, either turning down their thermostats (German families on average lived in temps 1 degree Celsius cooler through November and December). European-based companies reduced or shut down production (chemical-producers like BASF and fertilizer makers like Yara International did just that). In other cases, European countries used the crisis as a cheat day from net-zero commitments and swapped to cheaper but dirtier fossil fuels, like oil and coal.
“The US has become swing producer for the LNG market, third in output only behind LNG giants Qatar and Australia.”
US LNG exports, 2002-2022 Source: US EIA
US dry gas production, 2002-2022 Source: US EIA
Another reason was Europe’s success in getting more from suppliers like Algeria and Azerbaijan who happily piped in more gas than usual to Europe. But one of the most transformative occurrences—and one of our top 10 takeaways from energy markets in 2022—proved to be the incredible responsiveness of the global market for liquefied natural gas (LNG). Russia’s invasion of Ukraine in February 2022 converted Europe from LNG buyer-of-last-resort to premium market, sucking in LNG cargoes that would otherwise go to the big three buyers in Asia (China, Japan and South Korea). It also triggered a rush among American gas producers to frack more gas for Europe-bound vessels hovering in the Louisiana bayou. This has catapulted the US to become swing producer for the LNG market, incremental supplier primus inter pares among other LNG giants like Qatar and Australia. This surge in exports also explains why natural gas prices stayed unusually tight in the US for much of 2022. On the European side, policymakers made haste in getting infrastructure in place to take in this gas and link it to their networks. The congo line of LNG cargoes to Europe hasn’t fully replaced gas that otherwise would be piped in from Europe, but it’s certainly done a lot to ease supply concerns.
Europe’s LNG infrastructure. Source: European Commission
Double-shot of volatility, hold the gloom
Overall, expectations in the natural gas market are less grim for consumers. At just under $3 (per million BTU), it may also signal the post-pandemic post-Ukraine invasion natural gas boom is over, and a world of hurt awaits a lot of overextended producers banking on high prices and maximizing output. ‘A gas deficit situation this winter is becoming increasingly unlikely’, the German Federal Network Agency (Bundesnetzagentur) said this week. It’s not yet time to dance in the end zone, but it’s clear the gas blackmail that Putin hoped would split European allies and dampen their support for the Ukrainian resistance hasn’t worked.
