Europe has maintained an LNG price premium to Asia for over 70% of the year-to-date, attracting near record LNG inflows. European benchmark gas prices are currently hovering at USD25/mnBTU, falling drastically from the highs of over USD70/mnBTU seen in March 2022. Moreover, prices have stabilised around USD30/mnBTU in Q222, falling slightly from the USD33/mnBTU average seen in Q122, while volatility has reduced. Europe emerged from the relatively mild winter in 2022 with gas storage perilously low and extreme uncertainty surrounding gas supply from Russia, due to the invasion of Ukraine. The poor gas storage picture began in 2021, due to an unusually cold and protracted preceding winter combined with economy recovery from Covid-19. The gas was not sufficiently replenished during the summer months of 2021, partially due to Russia delivering only contracted volumes during this time. Renewables generally underperformed, compounding the situation further.
Prices have stabilised as LNG flows to Europe have remained above the five-year range for the majority of 2022 and show little sign of abating. The high LNG flow comes as Europe has maintained a price premium to Asia for over 70% of the year-to-date, averaging USD2.9/mmbtu. This is in stark contrast to historical price movements between Europe and Asia, where Asia normally maintains a prime premium due to limited pipeline alternatives. Europe has imported 60% more LNG in Q122 than Q121, and 35% more in Q222 than Q221. The LNG flows are greater than the first five months of 2020, when Europe imported the highest quantity of LNG on record as Europe acted as a global gas sink during the emergence of the Covid-19 pandemic. In our previous report, we noted that LNG imports had disappointed and had not alleviated the precarious storage situation due to the strength of competition for cargoes from Asia. The picture has reversed heading into summer 2022, with Europe maintaining its price premium over Asia and importing record volumes of LNG to meet demand and inject natural gas into storage. Given the high risks associated with gas flow from Russia, we expect the majority of spot cargoes to continue heading to Europe. Previously, we have undertaken analysis which shows a typical two-thirds drop-off in LNG imports into Europe over the summer months. This happens because cargoes head to Asia to meet rising demand for air conditioning. However, more likely this summer, is that LNG imports drop-off by no more than 50%, as Europe demands LNG to continue to refill natural gas storage up to at least 90% full.
Europe has fully reopened from the Covid-19 pandemic via successful vaccine rollouts. However, due to measures to reduce gas consumption, including public campaigns to conserve energy and the restarting of some coal power, we now forecast Europe's gas consumption to decline by 3.2% in 2022. The fall is driven by substantial downwards revisions to two of the largest markets in the region, Germany and Italy, which combined are expected to consume 11bcm less in 2022 than 2021. Both countries are heavily reliant on Russian gas and are taking measures to reduce consumption and diversify, including the leasing of multiple floating storage and regasification (FRSU) facilities to commence operations by the end of 2022 and into 2023. Elevated gas prices and the general inflationary squeeze is feeding through to consumers across Europe, leading to lower demand.