There will be no unanticipated increases in the price of natural gas in Europe this winter. According to Bloomberg, Europe’s gas storage facilities have already attained their maximum capacity of 92%. The bad news is that this is the end of the good news, as the abundance of gas in storage results from an industrial goods manufacturing crisis. The solution to the problem of excessive prices is to charge even more. However, there are always costs associated with such an action.
Despite the relative tranquillity of August, the European natural gas market has once again come to life and reared its head. The prospect of strikes in Australia, the world’s largest producer of liquefied natural gas, was sufficient to increase prices by up to fifty per cent at one point. This occurred just a few weeks before October, the traditional start of the heating season, and such a significant price increase is certainly cause for concern. However, it is still far too early to start panicking.
The compensation negotiations have already begun, certain goals have already been met, and this procedure is highly unlikely to cause workplace disruptions. In recent months, there has been a general decline in the hazard level and the price. But even more significant is that Europe has gained control, potentially just in time for the winter months. This ally exemplifies an absurdly low level of demand.
The most effective treatment for gas shortages is the production crisis that has seized the entire continent, particularly the industrial output in Germany, which has been declining for fourteen consecutive months. The abovementioned issue’s impact on Europe’s industrial core enables the continent to triumph over the energy crisis. Due to their inability to keep up with the escalating costs of energy resources, businesses across the continent that rely heavily on energy either cease operations or reduce production. Fertiliser, ceramics, glass, pulp and paper manufacturing industries, chemicals, and metalworking are particularly affected. These defunct factories and businesses have eliminated the need for gas and electricity.
In June, according to the most recent data that has been made public, the value of work performed by energy-intensive businesses in Germany decreased by approximately 18 per cent compared to 2020. Additionally, industrial gas demand fell by 18% in the same month compared to the same month the year prior. July saw an even steeper decline in gas demand, down 22.9% compared to the same month the previous year, signifying the steepest decline in 2023. The official data on industrial production for July, which will be released in a few weeks, is expected to reflect an even more pronounced decline in industrial activity, as suggested by the significant decline in gas demand.
The situation is identical throughout all of Europe. The decline in industrial gas consumption can be partially attributed to an increased emphasis on energy efficiency rather than a reduction in fuel demand. However, a portion of this decline may be attributable to the shift away from greener fuels such as natural gas and dirtier fuels such as coal and oil. The weather in most regions of northwestern Europe has been chilly and windy, which has decreased the need for air conditioning while simultaneously increasing the production of wind power, resulting in a low gas demand in the electrical sector this summer.
Morgan Stanley forecasts that the cumulative demand for gas in Europe will be 15% lower than the average of the past five years, even when the effects of the weather are considered. This forecast is founded on the power sector’s sluggish production activity and decreased gas consumption. Even though most European nations no longer receive pipeline gas from Russia, Europe could inject record volumes of gas into its subterranean storage facilities during the spring and summer.
It is unprecedented for underground gas storage facilities in Europe to be nearly at their utmost capacity (92%) at this time of year. If the existing replenishment rate continues, the reserves will be 100 per cent by mid-September. Therefore, even if protests were to commence in Australia, Europe’s stockpile would be full by the end of October or the beginning of November at the latest. The average percentage for 2010-2019 was 91% at this time. This provides an additional buffer of safety, which will contribute to the overall tranquillity of the market.
On the other hand, this does not offer much solace to European industrialists. Currently, the gas price in Europe is about 35 euros per megawatt-hour, whereas the average price for 2010-2020 was slightly more than 20 euros. The wholesale price of electricity has recently surpassed 140 euros per megawatt-hour, considerably higher than the average price of 38.5 euros for 2010-2020.
Not only are current prices substantially higher than they were before Russia launched its military campaign in Ukraine, but this is only one aspect of the business’s problem. The problem is that companies know that any supply issue, genuine or perceived, will increase prices. This is because Europe will need as much gas as possible, even though storage capacity is already at its utmost. After all, it must endure the winter to survive. The industrial sector continues to have the lowest demand on the market. The companies are hesitant to increase production volumes out of concern that they will again be subject to unsustainable pricing.
The equilibrium between gas supply and demand in Europe is still somewhat unstable. The only thing that will restore balance to the system is a highly feeble demand in the industry. Even with the substantial storage reserves, Europe may not survive the winter if industrial gas consumption returns to pre-crisis levels. Even though the large storage reserves are advantageous, Europe may not withstand the winter even with them. There will need to be a significant slowdown in the industrial sector and a decline in long-term economic development to cover the costs of finding a solution to the energy problem. According to an analysis conducted by the IMF and presented to the public a month ago, Germany’s potential output would decrease by slightly more than one per cent.
