Energy crises threatens to intensify
EU gas imports from Russia could well drop even further, whilst securing LNG imports will remain a major challenge. EU gas inventories are rising steadily so far, but maintaining gas imports during the winter even more important. Tight gas market fundamentals will keep prices elevated until 2025-26. European electricity prices are skyrocketing, but some markets surging even higher than others. Recession fears have pushed oil prices down towards USD 100/bbl, but will likely recover. Despite downward adjustments towards oil demand, tight supply will result in ongoing upward price pressure.
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Summary
Gas: Since 11 July, gas flows from Russia towards Germany via the Nord Stream 1 pipeline have halted due to annual maintenance. This time it is highly uncertain whether the gas flows will (fully) return after the 10-day maintenance. Ahead of the closure of Nord Stream 1, market fears of a longer lasting stoppage of gas flows towards Europe pushed gas prices towards the highest level since March. With gas inflows from Russia having dropped significantly, Europe is leaning strongly on the imports of liquified natural gas (LNG). So far, the build-up of gas inventories is going relatively well. However, there are no guarantees that the LNG inflows will remain as they are.
Japan Korean LNG (JKL) prices are moving in tandem with European gas prices. Although TTF prices have been trading above JKL future prices for several months now, which has been providing the trigger to ship any available LNG towards Europe. But also in the US, natural gas prices are very high. The US market is less dependent on imports as the US is a major gas producer itself. However, with international gas prices trading this high, US exports have reached record high levels earlier this year, pushing Henry Hub prices in June towards the highest level since 2008. All scenarios suggest that tight market conditions for natural gas are here to stay, keeping not only gas prices high, but also affecting power prices and other commodity markets indirectly. The shortages in the market would partly be countered by demand destruction, but tight market conditions will likely remain for the coming years. The gas-to-coal switch also adds upward price pressure to coal and carbon allowances, and would not trigger much relief for gas prices as the focus will remain on inventory building.
Electricity: Electricity prices throughout Europe have been on the rise too. Not only higher gas prices, but also higher coal prices are translating into surging electricity prices. On top of that, there are some local issues, which have resulted in differentiation amongst countries in northwest Europe, highlighting the variation in the local electricity mix from one country to another.
Oil: Recession fears have pushed oil prices below USD 100/bbl. The question is whether global demand for oil will be seriously hit, or whether it is ‘just’ a market reaction to fears and economic slowdown as a result of the high energy prices and high inflation numbers triggering a technical reaction. There are two main reasons for the economic slowdown. There is an impact of higher energy prices and the effects of the tightening policy by central banks. An economic slowdown normally coincides with lower demand for energy too. We think that global demand growth may ease, but will not drop as severely as it may have done in previous cycles.
Also due to the supply side, the market reaction could be different than in the past. All eyes will be on the OPEC+ meeting on 3 August to see how OPEC+ will react to the market circumstances with Russian production and exports under pressure, whilst large oil consumers (like the US) have been asking for more crude to dampen high energy prices. Second, this time spare production capacity also may show a different reaction despite a drop in oil demand due to lower economic growth. Finally, a lack of investment is something that has been a long-running theme. Overall, the investments in exploitation have declined significantly in recent years. This also translates into lower future expected production capacity, both from OPEC and non-OPEC. Because of this, we think that the main risks for oil prices remain tilted towards the upside.