Gas Markets in Europe: Tightening the Screws on a Market Already in Agony

Days before the Russian invasion of Ukraine, the International Energy Agency released its gas market report for the first quarter of 2022. We review the report and ask Bjørn Inge Vik, Insight by Volue analyst, to forecast the gas market following the invasion.

Gas market europe ukraine

The gas market report by the International Energy Agency (IAE) examines last year's highlights in the sector and offers a market update as well as a forecast for the short term.

Based on 2021 trends, IEA expects the following developments in 2022

  • After surging to all-time highs late last year, Asian and European spot gas prices are expected to remain high.

  • The impressive 10 per cent increase in Eurasia’s natural gas production in 2021 will shrink to below 1 per cent.

  • Asia’s uneven gas demand recovery will continue into 2022 but at a slower pace.

  • The production growth in the US, supported by operational optimisation, is set to continue.

  • Having achieved a 6 per cent increase last year, global LNG trade will slow to 4 per cent, with Asia Pacific driving import and North America leading export.

The gas markets after the invasion of Ukraine

“The invasion of Ukraine has changed the picture and tightened the screws on a market already in agony,” says Volue's Bjørn Inge Vik, market analyst specialising in LNG and carbon.

“Gas is the fuel most directly affected by the invasion due to Europe’s reliance on Russian pipeline exports. Roughly 40 per cent of Europe’s gas consumption is covered by Russia.”

The TTF April contract increased from €88/MWh on the day before the invasion to €174/MWh at the time of writing.

“In response to the Russian aggression, Germany has halted the approval process for Nord Stream 2 and the pipeline could very well be permanently scrapped. There’s also considerable general uncertainty about future Russian exports via existing routes.”

According to Bjørn Inge Vik, this drives market risk and volatility.

“It is clear that Gazprom has already held back on pipeline supplies to Europe for some months, but flows have actually increased slightly since the invasion. Fear of further escalation of the conflict, sanctions and the response by Russia are key drivers for what is to come for the gas market.”

A complete halt of Russian exports would mean that Europe won’t be able to replace lost gas with other sources and we will see a reduction in demand – consumption, would likely drop because there would perhaps be rationing or curtailments in the industry sector, and private households and companies would use gas more sparingly due to the high prices.

We can expect continued high prices in the midterm.

“Europe’s reliance on LNG will be cemented going forward, intensifying the price competition with Asia at times of high demand. Longer-term developments depend on the outcome of the conflict and if and when Nord Stream 2 goes live.”

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