Energy Outlook: Price shock to take a while to unwind

We have revised our forecasts for gas and oil prices significantly higher.

There is a whole medley of factors that have come together to generate this unprecedented situation. Due to the relatively harsh winter of 2020/21, stocks were at relatively low levels. At the same time, the rebuilding of stocks was slow. This was partly because gas demand this summer was higher than expected due to lower wind energy yields. In addition, the marginal supply of gas from Russia was under pressure due to a mixture of demand from elsewhere and geopolitical posturing. Although Russia neatly adhered to the agreed long term supply contracts, it turned out that there was little additional supply of gas heading towards Europe. On the one hand because the supply of liquefied natural gas (LNG) - from Russia, but also from other suppliers - was mostly transported to Asia. On the other hand, it is suspected that the Russians wanted to put pressure on European leaders in order to secure the permits for the NordStream 2 pipeline. The demand for gas in Asia has jumped due to problems in the production and import of coal, the main source of energy in China.Given the supply situation, we have revised our forecasts higher. Our estimates refer to the contract with delivery for the coming delivery year. For the end of this year, we have increased our estimate from EUR 30/MWh to EUR 50/MWh. For the end of 2022, we expect a price of EUR 30/MWh, which is 50% higher than in our previous estimate. Only in 2023 do we see a normalization of gas prices. This is due to the continuing high global demand for natural gas in order to reduce the use of other energy sources (such as coal and nuclear power). Also, the supply of LNG is no longer increasing, so there are more buyers for an at best unchanged amount of natural gas. The persistently high price of CO2 also contributes to the higher price of natural gas. We have also upgraded our forecasts for oil prices. Oil demand is now roughly back to the level it was before the start of the corona crisis (100 million barrels per day (mb/d), while given the economic outlook it is expected to increase further. Meanwhile, OPEC+ is normalising supply only slowly. As a result, the balance between supply and demand is currently slightly out of sync. This will lead to continued upward price pressure. Only towards the fourth quarter of 2022, according to the current production plan, OPEC+ will have increased oil production to the level of early 2020 and supply and demand should be more balanced. For more on our energy price outlook, see our note here.