Europe has struggled to attract LNG imports despite record prices and a narrowing of the Europe-Asia benchmark spread. NBP Prices have more than doubled since May, to record highs, as a perfect storm of factors have coincided to limit gas supply in Europe. An unusually cold and protracted winter saw above average gas demand across many European countries. This depleted gas storage to the lowest levels coming out of winter in several years, which has not been sufficiently replenished during the summer months. The procurement of adequate natural gas supply to restore storage levels has also met difficulties. Russia, which also experienced a cold winter, has been reluctant to boost exports to Europe through Ukraine, instead preferring to wait until Nord Stream 2 is complete. This has been compounded by underperforming renewables and high carbon and coal prices pushing up power prices and increasing the need for gas generation, although this has been slightly relieved by higher wind output in recent weeks.
Exacerbating the lack of gas imports to the region are tight LNG market conditions due to high demand in Asia, which saw many cargoes diverted east rather than to Europe. This is in stark contrast to the last few years, where consecutive mild winters in 2018 and 2019 led to high storage levels which impeded Europe's ability to act as a global gas sink during the summer months. In our previous report, we noted the precarious storage situation as an upside risk to LNG imports for 2021, however, this did not materialise due to the strength of competition for cargoes from Asia. Therefore, Europe is heading into winter with the lowest levels of storage since modern records began in 2011 and yet with prices still trading at a discount to the Asia LNG benchmark. This presents mixed risks for LNG imports into Europe over the winter season. Spot LNG cargoes could rise to alleviate any shortfall in output from gas storage. However, with Asia maintaining a price premium for the foreseeable future, we expect the majority of cargoes to continue to head east.
Europe has been broadly successful in suppressing the worst effects of the Covid-19 pandemic via successful vaccine rollouts. Therefore, we forecast Europe's gas consumption to grow by 2.8% in 2021, comfortably higher than the 3.4% decline estimated for 2020. Demand is meeting headwinds due to the record high gas prices across Europe, leading to factories lowering output or even closing entirely. This, compounded by broader supply chain and labour market disruptions and ongoing inflationary pressures, will continue to be the greatest downside risk to our forecast, until high prices and supply chain pressures abate, which we expect in mid-2022.