Sharing insights elevates their impact (2024)

BLOG Dec 20, 2021

Key Implications:

• European gas demand has remained resilient through 2021 despiterecord high spot prices, showing limits to demand-sideresponse.
• Meanwhile, a slow certification process for Nord Stream 2coupled with a continuing lack of auction sales by Gazprom makeflexible upside to supply less likely.
• Storage levels are likely to enter the 2022 injection season atlow levels, even assuming normal winter weather.
• Spot gas prices are expected to stay higher for longer throughspring and summer 2022, averaging €44/MWh and €34/MWh over secondand third quarters, respectively.

The European gas balance has been tightening through much of2021 as gas demand has increased relative to 2020 and the loss ofsignificant demand- and supply-side flexibility has pushed pricesto new all-time highs.

Yet gas demand has proved very resilient in the face of thesehigh prices. Looking forward to 2022, bullish demand driverssuggest further market tightness through the wintermonths—beyond what was previously expected—while prospectsfor incremental supply remain limited.

Gas demand has proven resilient

European gas prices increased threefold from early third quarterto end-November 2021, reaching levels five times higher thanaverage fourth quarter 2020 prices. Yet what is striking is that,despite this jump, there has been relatively little impact onEuropean gas demand, showing the limits to the price elasticity ofEuropean gas demand and the limits to fuel switching potential inthe power sector.

Figure 1: European gas demand in top 6 markets

In the power sector, coal has become more economic thangas—and has therefore been dispatched ahead of gas. In othersectors, gas demand has proven resilient: third-quarter industrialdemand was down only 3% year on year, while residential andcommercial demand rose by 9%. The announced factory curtailmentsover third quarter from various industrial subsectors andplants—most notably for fertilizer and methanol—turned outto not affect total gas demand materially. What is more, certainplants are already scheduled to come back online in the currentprice environment.

Extra supply from Russia is uncertain

Since October—the start of the "gas year"—there has beena significant step-down in Russian pipeline imports, spookingmarkets. Russian pipeline flows to Europe had remained on par with2020 levels from January to October this year, covering contractualobligations to European buyers, but little else, judging from thevolume of flows and the lack of sales taking place on Gazprom'sElectronic Sales Platform (ESP). However, flow volumes declinedwith the start of the new gas year on 1 October, with average dailyflows falling to 322 MMcm/d in October and November from an averagelevel of 393 MMcm/d for April-September.*

Figure 2: Russian pipeline natural gas exports toEurope

Furthermore, on November 16, 2021, the German energy regulatortemporarily suspended the regulatory certification process for theNord Stream 2 pipeline project, saying that Nord Stream 2 AG, aSwiss entity, must establish a subsidiary in Germany to own theportion of the pipeline that lies in German territorial waters.Practically, this delays the certification process of the pipeline,including the regulator's deadline to issue a certificationdecision, the subsequent review by the European Commission, and thefinal decision by the German regulator. IHS Market estimates thatthis could push final certification as late as September 2022.

Given this picture, and subject to uncertainty about buyernomination levels, IHS Markit does not expect significantsupply-side support to the market through the current winter or,indeed, into the spring.

Storage behavior will provide the price-criticalsignal

Coming into winter 2021/22, European storage facilities are in afar less favorable position than last year, with storage fillpeaking at about 80 Bcm in late October—compared to 98 Bcm in2020—and turning to net withdrawals since then.

• Benchmarking against low-end withdrawal rates from recent yearswould suggest storage levels could be at average levels by the endof winter.
• An average drawdown would send European storage to the bottomof the historical range by end-March 2022.
• Under a similar drawdown pattern as last year—a high level,but still shy of the approximate 73 Bcm maximum drawdown in recentyears—European storage would end winter at record-low levels,with less than 15 Bcm of gas in store by the end of March.

Price risk lies firmly to the upside—beyond winter2021/22

IHS Markit was previously forecasting Title Transfer Facility(TTF) prices to start weakening markedly from the second half ofFebruary 2022, continuing their descent in March and falling backwithin the coal-gas switching range at the start of secondquarter.

However, a delay in the fall in prices back toward historicalbenchmark levels is looking increasingly likely. Given how supplyand demand dynamics are now expected to play out for the currentwinter season, European prices are more likely to remain at currenthigh levels—unanchored from power sector fuel competitiondynamics—for longer and to remain highly volatile through firstquarter 2022. In the absence of significant supply upside, it seemsincreasingly likely that downside price pressure will be delayed toend-winter.

The combination of storage fill requirements at the end ofwinter 2021/22 being higher than previously expected and the limitsto supply upside points to summer 2022 prices at TTF being about25% higher than previously forecast. With bullish pressure onprices through summer, subsequent winter prices are set to peakabove the coal-gas switching range, again breaking above ahistorical ceiling benchmark.

* These figures have been converted to standard cubicmeters, which IHS Markit defines to have a gross calorific value of11.0485 kWh (calorific content 9,500 kilocalories per cubic meter),measured at 15 degrees Celsius.

References: IHS Markit paid subscribers can access relatedreports: European gas prices: In search of anew price ceiling and The European gas and power crunch:Addressing 10 key questions.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.