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| The energy crisis no longer seems to be a concern in Europe. Illustration photo. (Source: AP) |
Experts say the resilience of energy prices amid market volatility is a strong sign that the worst nightmare that sent prices soaring and pushed inflation to multi-year highs is behind us.
The European Union (EU) will cut its imports of Russian gas by nearly a third of the 155 billion cubic meters it imported in 2021 in 2023, according to estimates by the EuroGas trade association. The 27-member bloc has done so by tripling its imports of US LNG.
“LNG is a relief for Europe and contributes to stabilizing gas and electricity prices for consumers in the region, after a long period of record high prices due to reduced Russian supplies,” said Didier Holleaux, President of EuroGas.
New realities and unique challenges
Europe is currently benefiting from record gas reserves, support from renewables and a relatively mild winter. Slowing economic growth is helping to curb energy demand in major industrial powers like Germany.
The issues are enough to bolster traders’ confidence that the region is on solid footing through the rest of the winter, with benchmark European prices currently trading below €30 per megawatt hour, about a tenth of their 2022 highs.
However, after overcoming the crisis, Europe entered a new reality, with its own challenges.
The region is increasingly reliant on renewable energy and will face intermittent power generation. With the loss of Russian gas, Europe will also have to look elsewhere to meet demand. That means the region will have to compete with other parts of the world for LNG market share.
“If you look at prices alone, it looks like the energy crisis is over,” said Balint Koncz, head of gas trading at MET International in Switzerland. “But Europe is now at the mercy of global factors that can change rapidly.
Gas prices could rise again – even this summer – if supplies are suddenly disrupted or the weather does not cooperate.
One major risk that could impact Europe is the situation in the Middle East. Attacks on ships in the Red Sea – the route Qatar uses to ship LNG to Europe – could disrupt supplies.
Oil and gas tankers are avoiding the Red Sea, choosing instead to sail around southern Africa.
According to data from data provider Kpler, about two to three LNG vessels will use this route every day.
Global energy markets have largely not reacted significantly to the tensions in the Red Sea, but the future is uncertain, said Homayoun Falakshahi, senior oil analyst at Kpler.
"Circumspect"
Gas prices have fallen nearly 60% in 2023 and another 12% so far in 2024, data compiled by Bloomberg show. That should help lower consumers’ energy bills.
This is the second winter Europe has gone without Russian gas, said Kim Fustier, head of European oil and gas research at HSBC Holdings.
“The reality is that there is already a precedent. The 2022-23 winter season went off without any problems,” he said.
Europe’s embrace of renewables means that gas is increasingly taking a back seat in the continent’s energy mix. The rise of wind turbines and solar installations has helped reduce demand for the fuel, while the return of French nuclear power in 2023 has also eased market tensions.
But Bloomberg news agency commented: "There is still a long way ahead, with many obstacles."
Currently, Europe still receives Russian gas via Ukraine. After Russia's Nord Stream pipeline was damaged in a sabotage incident in 2022, the transit route through Ukraine remains the only way to bring Moscow's gas to Western and Central Europe.
However, the gas transit deal between Russia and Ukraine expires at the end of this year and is unlikely to be renewed, meaning the continent could receive less gas from Moscow.
Meanwhile, the EU is the world’s largest LNG buyer, and has invested billions of dollars in infrastructure to increase its import capacity, adding six new terminals since early 2022. Countries around the world are also investing heavily in LNG, but much of the new capacity will not be available until 2025.
China is set to become the world's largest LNG importer by 2023. In fact, the world's second-largest economy is importing so much LNG that some are starting to worry that it will drive up spot prices in the European market.
An analysis of supply shifts by experts at Rice University's Baker Institute for Public Policy (USA) warns that European countries risk becoming overly dependent on one LNG supplier - something the region has done with Russian gas in the past.
In addition, extreme weather events are becoming more frequent, straining the power system and potentially forcing Europe to need more gas supplies than usual.
Problems at two key LNG routes - the drought-hit Suez Canal and Panama Canal - are lengthening the journey for imports of the commodity to Europe, adding to shipping costs.
In addition, dramatic fluctuations – from LNG strikes in Australia (2023) to the outbreak of the Israel-Hamas conflict – have caused gasoline and gas prices to spike, a reminder that the energy situation in Europe is still far from stable.
Given the above difficulties, it seems that, with the energy market, “caution” is still the key word for Europe. As Mr. Stefan Rolle, head of energy policy at the German Ministry of Energy, recently affirmed: “We are still very cautious about what will happen next.”
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