LNG - A volatile winter?

As Europe enters the winter season, the global gas and LNG markets face heightened volatility, influenced by fluctuating demand, geopolitical tensions and unpredictable supply.?

In an insight report, the LSEG delved into the key factors shaping the outlook and examine how Europe’s energy future may unfold in the coming months.

? Mixed demand and supply dynamics: European gas demand remains steady, but regional supply constraints, along with reduced LNG imports, heighten concerns.

? Geopolitical uncertainty and market volatility: Ongoing geopolitical risks play a crucial role in price fluctuations and create a fragile market environment.?

? LNG’s critical role in winter 2024: Despite increased US and Qatari supply, winter shortages?remain a risk, particularly if weather conditions worsen or geopolitical events disrupt gas flows.

This summer, European gas demand remained relatively stable, with slight increases in some areas like local distribution zones (LDZ), due to a colder spring. However, a reduction in gas usage for power generation balanced out the increased residential demand.

On the supply side, Norwegian gas production increased, offsetting production declines in the?UK and the Netherlands that slowed, due to natural gas field maturation.

Summer TTF gas prices stayed within a similar range to last year, but the market has experienced price fluctuations driven by external shocks. These included geopolitical tensions, such as conflicts in the Middle East and the ongoing war between Russia and Ukraine, as well as natural events like US hurricanes, which disrupted LNG supplies.

Events, such as Norwegian gas field maintenance or further geopolitical developments, could result in sudden price spikes. Currently, prices are trading within a tight range of €37/€42 per MWh, but further volatility is expected as winter progresses.

Investment activities are also playing a role in the fluctuating market. Hedge funds have reduced their long positions, while commercial players have increased theirs, reflecting diverging views on the market’s trajectory. This divergence has added to the volatility, as different players hedge against geopolitical risks and market imbalances.

Projections

Looking ahead, market expectations remain cautious. While prices are projected to stay within the stated range this winter, various external factors could cause significant fluctuations. A colder than expected winter, further geopolitical unrest or supply disruptions, could push prices higher. On the other hand, a mild winter could ease pressure on gas stocks, thus stabilising prices.

While Europe has relied heavily on LNG imports over the past two years, the dynamics have shifted, as comfortable gas storage levels and improved Norwegian supplies allowed Europe to reduce LNG imports by 25%.

The LNG market remains sensitive to risks, including potential supply disruptions in major exporting countries like Australia, the US and Russia. Furthermore, Egypt’s shift from an LNG exporter to an importer, due to domestic production challenges, has added to market concerns.

LSEG has developed a model to forecast gas demand across three key sectors - residential (LDZ), industrial and gas for power. This approach integrates sector-specific drivers, regression models and scenario planning to predict demand trends accurately.

? Residential (LDZ): Demand is expected to rise by 2%, driven by colder weather conditions, despite structural adjustments in the?market.

? Industrial: Although the sector saw peak demand destruction of around 25% during the energy crisis, recovery is anticipated over the next year, with Germany's chemical industry showing early signs of growth.

? Gas for power: With gas prices expected to align closer to global benchmarks, demand for gas in power generation is likely to?increase.

Supply risks

Although the global LNG market is set to grow by around 5 bill cu m this winter, largely due to increased supplies from North America, Europe faces significant supply risks. Any unexpected outages in key LNG exporters like the US or Australia could strain Europe’s gas supplies.

Europe’s winter outlook remains uncertain, with gas storage levels expected to be a critical factor. A mild winter could leave storage at just below 50% capacity by spring 2025, but a colder season may lead to serious supply shortages, causing prices to surge.

As winter approaches, Europe’s gas and LNG markets face a delicate balance of supply, demand and external risks. Geopolitical tensions, weather patterns and?investment fund activities are all poised to impact the market, the LSEG said.