Six months ago, I was cautiously concerned about the impending ‘Winter of Doom’ descending on Europe. And winter is finally here now. Or is it?

Temperatures across Europe have remained unseasonably warm this winter, even recording the warmest recorded temperatures in multiple places. This unseasonal surprise has been very welcome for everyone waiting to see how Europe would cope in its first winter without Russian gas. And Europe has coped admirably. The TTF gas prices are down over 5x from their high of €311/MWh on 25th August to the current price of €57/MWh on 31st January. The gas price today in fact is also a third of the level that it was at the same time last year. This price level bodes well, not just for severely hit gas suppliers like Uniper (who expects a €19 billion loss as a result of replacing gas volumes) and SEFE, but also for all the governments who have capped the gas prices for their customers to ease the cost-of-living crisis. Let us examine some key factors that led to the fall of the TTF benchmark prices:

• Demand destruction: Warm weather has played a huge part in ensuring that the EU countries meet their gas demand reduction targets. In addition to the warm weather, different governmental incentives have also been key to cut demand across the continent. This demand reduction however came at the risk of the ‘deindustrialisation’ of Europe, with some major companies like BASF even saying that they would be downsizing permanently in Europe. Industrial gas demand in 2022 is approximately 20% lower than in 2021 (Source: International Energy Agency. How to Avoid Gas Shortages in the European Union in 2023 www.iea.org).
• Full storages: The main question that we faced back in August was the uncertainty of European nations reaching their mandated levels of at least 90% full gas storages by November. This uncertainty drove up volatility in the gas markets and prompted the gas prices to reach unprecedented levels. The prices were also pushed higher by countries trying to fill up their storages at any cost necessary. However, increasing delivery of natural gas flows from existing and new suppliers, in combination with record LNG flows to the continent brought the anxiety in the marketplace down to a simmer. Europe imported 60% more LNG supply to the continent than the year before.
• The Nuclear Story: There are two facets to the nuclear story in Europe in 2022. The first is the more commonly known French nuclear shortage disaster. The biggest electricity exporter in Europe, EDF, who had helped keep prices down across the continent, faced an unforeseeable summer of increasing nuclear outages, due to the corrosion found in many of its 56 reactors. Lack of nuclear energy in France prompted alternate sources of supply, and in an ironical twist, led to a delay in closures of nuclear plants in Germany and Belgium. Governments who had previously enforced early shutdowns of nuclear plants were now pleading with companies to keep them open. This delay in nuclear shutdown, particularly in Germany, has helped keep the lights on while keeping gas demand on the lower side.

These above factors do point towards a lower gas price market in 2023, but some key challenges remain. In the first half of 2022, we still had Russian gas flowing into Europe, even though it became increasingly sporadic and eventually stopped. Without that initial flow, we would not be breathing easy right now. Along with lack of Russian gas, another factor potentially contributing to the supply gap is the reopening of the Chinese economy. Lack of Chinese demand in 2022 was instrumental in Europe being able to redivert massive LNG cargoes away from China. Now with China’s demand returning, LNG supplies could be very tight for Europe in the coming year. According to the IEA, there could be a supply-demand gap of 57 bcm in Europe this year, equating to ~14% of the total demand. The image below, illustrates the supply gap:

Expected changes and additional actions to close the supply-demand gap in the European Union in 2023