"Last year's hottest gas market has cooled, and some of the change will stick.
Demand for natural gas in Europe hasn't bounced back despite lower prices. The region's TTF benchmark price is down 85% compared with a year ago, when Europe was rushing to fill its gas-storage facilities for winter after Russia's supply was cut off by sanctions. Prices have fallen partly because Europe's gas storage is full. It hit a 90% capacity target last week, more than two months ahead of a schedule set last year by the European Union.
But underlying demand is weak. According to think tank Bruegel's European natural-gas demand tracker, use of gas in the first quarter of this year was 18% lower than the 2019-2021 average, and 19% below in the second quarter. The declines have accelerated from the 12% fall last year.
Weaker economic growth is one reason why gas use hasn't recovered. Another may be that lower wholesale prices haven't been passed on to end users yet, according to Ben McWilliams, author of the Bruegel tracker.
Other factors will be more permanent, notably new technologies. The European Heat Pump Association said sales of heat pumps rose 39% in 2022. They are now installed in 16% of Europe's residential and commercial buildings, often replacing gas boilers. Heat pumps require electricity, which is often produced using gas, but this too is changing. Installations of new solar capacity rose a record 47% in 2022, and last year was the first time that renewable power generated more of Europe's electricity than natural gas.
One uncertainty for future gas demand is whether European industries such as chemicals and fertilizer manufacturing will return to normal. The International Energy Agency thinks that up to half the decline in Europe's industrial gas demand last year was a result of production shutdowns. Certain companies whose business model traditionally relied on cheap Russian gas moved manufacturing to lower-cost regions such as the U.S., where gas costs roughly a quarter of the European spot price.
European gas prices will be volatile until more global liquefied natural-gas supply arrives in 2025. The TTF jumped 5% on Monday because of worries about strikes at an Australian LNG terminal. Companies may be reluctant to restart their European factories until the region's energy costs are more predictable.
Before the Ukraine conflict, global demand for natural gas was expected to increase 18% between 2021 and 2030, according to estimates from the Oxford Institute for Energy Studies. This forecast has since been cut to 10%. Lower growth expectations reflect the sharp cutbacks in Europe as well as the U.S. Inflation Reduction Act, which will supercharge America's shift to renewable energy.
None of this is ideal for the U.S. LNG players who are pouring billions of dollars into new production. Based on projects that have secured funding, and those in the pipeline, U.S. LNG export capacity could double by the end of this decade, according to Wood Mackenzie estimates.
True, Europe needs plenty of LNG over the next few years to replace the shortfall left by Russian pipeline gas. But the faster the region weans itself off gas, the sooner exporters will need to find a new home for at least some of their cargoes.
The expectation is that countries using a lot of coal in power generation, such as India and Pakistan, will switch to natural gas to cut their carbon emissions -- assuming prices come down enough to make that transition affordable. "The window of opportunity for natural gas is tightening all around the world, although coal-reliant markets in Asia provide growth prospects over the medium-term," says Gergely Molnar, energy analyst at IEA.
Buyers and sellers of natural gas took different lessons from last year's record prices, and the fuel's reputation as a cheap, reliable form of energy took a hit. The pace of change in Europe's gas market raises the risk of a glut." [1]
The gnome leading Germany, Chancellor Scholz, supported the idea of sanctions on Russian pipeline gas. Those sanctions cut off the supply of cheap Russian gas. This leads to the deindustrialization of Germany, so the Americans lose the only money having buyers for their expensive gas, the Europeans. No one else will buy such expensive American gas anyway because they don't have as much money as the Europeans.
Lithuanian LNG terminal, called Independence and delivered to us by Grybauskaitė, is a huge risk for Lithuania.
1. Europe's Gas-Guzzling Days Are Fading. Ryan, Carol.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 22 Aug 2023: B.12.
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