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    Europe saves the natural gas crisis in winter, but is already preparing for next summer

    January 17, 2023 - CE Noticias Financieras


      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 Lenar?i?, assured that the EU executive was preparing for worst-case scenarios, including widespread blackouts. With reserves up by more than 82% (compared to a historical average of 70%), warm temperatures at least 7% above the average of the last ten years and consumption that has been falling for five months, with a further 12% drop in December according to Morgan Stanley data, 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 the hydrocarbon on the Dutch market, still the benchmark in Europe, has fallen to 60 euros per megawatt-hour, a level similar to the one it had before the start of the war in Ukraine.

      But the B-side of this good fortune may be just around the corner. "There are market conditions that could cause another price increase during the summer months this year," Norbert Rucker, head of economics at Swiss bank Julius Baer, tells CincoDías.

      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. "April will mark the start of the gas market injection season, 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 the levels of supply by pipeline and ship will determine the evolution of reserves and price levels", he emphasizes in conversation with this newspaper.

      Numbers in the red

      The President of the European Commission, Ursula von der Leyen, recognized at the end of 2022 the challenge that the EU-27 had ahead. "We know that 2023 will be more difficult and we may face a potential shortfall of almost 30 billion cubic meters next year." This shortfall, which represents 7% of this year's total forecast demand, could come as early as next summer, estimates the International Energy Agency in a recent report

      For the time being, the worst-case scenario has not arrived. Although Russian gas supplies in the first week of the year were less than a third of what they were a year ago, the Kremlin has not yet definitively turned off the tap to Europe. The problem is that it seems unlikely that EU countries will count on increased shipments from Moscow, which in 2022 accounted for 18% of European imports.

      The sabotage, still under investigation, of the Nordstream I and II pipelines, through which the EU bloc could receive 14% of its total consumption in 2021, puts further pressure on shipments of liquefied natural gas (LNG)


      Part of the European commitment to make up for this gap lies precisely in the commissioning of new LNG regasification terminals, as well as the reestablishment of all the supports that did not work last year.

      Investments by national governments allowed for a 5% increase in gas import capacity in 2022, and an additional 12% is expected in 2023, according to data from the Bruegel think tank. Most of the infrastructure to come online are LNG regasification plants, which depend on the ability of governments and companies to attract ships to their shores in a fiercely competitive international market.

      Rucker remains optimistic that these new investments will be accompanied by the resolution of the (unforeseen) problems suffered by European infrastructure last year. "The crisis in Europe may disappear as quickly as it came because its roots are cyclical and not structural. Last year's combination, especially the energy shortage in China, France's nuclear problems and the impact of the war in Ukraine was exceptional and cannot be repeated," he tells 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 Gallic country to require large imports from Germany and the United Kingdom, increasing tension on the continent. The increased availability of the 56 reactors would increase generation by 16%, estimates the S&P Global agency. Locally, Spain experienced "the worst hydro year in decades" in 2022, according to the Minister of Ecological Transition, Teresa Ribera. This increased Spain's dependence on combined cycle power 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 last year, but the market estimates that it will be "several more months" before this becomes a reality. Its impact is not minor: Freeport represents 15% of U.S. LNG export capacity, central to the new European energy mix. It also blocks the possibility of Europe benefiting from the growth in US production, which the local regulator estimates at more than 3% by 2023.


      The other part of Brussels' response corresponds to changes in the shape of the European gas market. Brussels plans to implement three major changes in the first quarter alone: the implementation of the controversial gas price cap, the start of joint purchases for a minimum of 15% of its reserves and a new price index to displace the TTF for LNG. Brussels hopes with this trio of measures to have greater control capacity and thus avoid competition among the EU-27, a common scenario this year.

      Analysts' fear is that the implementation of changes in the political and regulatory context, as well as events on the front line, could generate a new summer of high prices. The futures values of the TTF index peaked last August 25 at E311 MWh, 235% above year-end average values.

      At the moment, gas deliveries in the TTF futures market for the summer are trading only 4.7% above the benchmark. However, this is not necessarily an indicator of relevance. Miguel Gil Tertre, head of the Economic Analysis unit of the European Commission's Energy directorate, is skeptical about the impact of this low differential heading into the summer. "Futures prices have proven to be consistently incorrect over the last 15 months for forecasting future prices," he claims on his Twitter account.

      Indeed, futures market values do not match the expectation of analysts, who see values above E100. But the real fear is that the strong volatility of last year will continue. The variation of gas prices in the TTF market was slightly above 6% throughout 2022, both upwards and downwards. This is in stark contrast to the Brent barrel, whose variation was limited to one-third, at 2%.

      Looking ahead to the coming months, "the greatest volatility is expected on the supply side, and could be affected by expectations of shortages in LNG supply and, therefore, lower natural gas reserves than expected," explains Cautel.


      2022 has confirmed that black swans, fortuitous events that cause surprise, exist. "2022 has been one of the five warmest years in history and is a reminder of the risks of climate change and its impact on weather patterns," notes a commodity forecast from Swiss bank UBS. There is nothing to prevent the high temperatures that are a source of joy for the EU-27 today from becoming 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 presents governments with the dual challenge of filling gas tanks for the coming winter while demand for electricity generation remains high.

      Last summer, 33% of electricity generation in Spain came from gas, according to July-September data 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, as well as 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 household consumption continues at moderate levels, as well as security of supply, is central 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.


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