Gas markets remain tight into 2023
The IEA’s latest quarterly Gas Market Report is highly suggestive of continued market tightness spilling into 2023. This outcome is a continuation of Russia’s restricting trading of LNG. The reduction in trade has rocketed international prices, creating minor fuel shortages for plenty of emerging and developing economies across the globe.
Since 2021, the natural gas market has tightened. Global gas consumption in 2022 is expected to decline by 0.8%. Whilst global gas consumption is suggested to only increase by 0.4% next year. The actual results will be subject to uncertainty, specifically reliant on Russia’s future actions and the economic impact of consistently high energy prices.
In response to the Russian invasion of Ukraine, Europe has imposed sanctions that have been met with consequences. In return, Russia has almost entirely cut off gas supplies to the majority of Europe. With winter quickly approaching, there is tension across the market for both households and industries across Europe that are reliant on liquefied natural gas (LNG).
“Russia’s invasion of Ukraine and sharp reductions in natural gas supplies to Europe are causing significant harm to consumers, businesses and entire economies – not just in Europe but also in emerging and developing economies,” said Keisuke Sadamori, the IEA’s Director of Energy Markets and Security. “The outlook for gas markets remains clouded, not least because of Russia’s reckless and unpredictable conduct, which has shattered its reputation as a reliable supplier. But all the signs point to markets remaining very tight well into 2023.”
There is uncertainty surrounding the replacement of higher-emission fossil fuels with LNG. This was expected to increase at least in the medium term when markets were expected to rise.
In China and Japan, natural gas demand is almost unchanged. Whilst in India and Korea, demand decreased. Despite this, Chinese gas demand is only expected to increase by 2% this year, which is actually its lowest annual growth rate since the early 1990s. In the United States, natural gas prices were the highest this summer since 2008, yet demand has not increased due to the shared reliance on power generation.
To offset the cutoff supply from Russia, Europe has relied on LNG imports along with pipelines supplied from Norway and additional locations. The 65% increase in LNG demand during the first eight months of 2022 drew supply from typical buyers in the Asia-Pacific region, where the demand for LNG had already dropped by 7% due to the high prices, poor weather and relentless COVID lockdown restrictions.
It is forecast by the IEA that Europe’s LNG imports are due to increase by over 60 billion cubic meters (bcm) this year. This is because the international LNG trade is under immense pressure as it amounts to more than double the global LNG export capacity. Consequently, Asia’s LNG imports will be lower for the remainder of 2022, but China’s LNG imports may rise in 2023 as a result of new contracts. A colder-than-average winter would also create higher demand from northeast Asia, increasing the demand for the LNG market.
To provide gas security, the European Union and its member states have pledged to diversify supplies, set minimum storage obligations, and implement energy-saving measures during the coming winter. As of the end of September, EU storage capacities were approximately 90% full, the lack of Russian supply generates a challenge in replenishing these stores at the start of next year. Japan and Korea have both introduced policies to reduce their national reliance on imported LNG with contingencies should the supply continue to be disrupted.
Within their report, the IEA performed a resilience analysis of the EU gas market in the circumstances that Russia performs a complete supply shutdown commencing from 1 November 2022. In these circumstances, the analysis suggests that without demand reductions in place, the EU gas storage would be less than 20% full in February 2023, assuming a high supply is achieved and 5% full if a low supply is obtained. At these levels, supply could be disrupted in the event of a late cold spell. To combat this, a reduction of EU gas demand of 9% from the typical level would be required to maintain stores at over 25%. Also required would be a 33% decrease in demand from the previous 5-year average throughout the winter period. This is the only way to maintain storage levels. The resulting effect this has is that gas-saving measures are critical to the supply of inventories at an adequate level until the end of the heating season.
