Over the past 18 months, we've seen a notable decline in gas and power prices. This decline is a welcome relief after the sharp spikes experienced during the 2022 energy crisis. However, despite this positive trend, prices have not returned to their pre-crisis levels. Understanding the reasons behind the fall in prices, as well as the persistent risks that prevent a full return to normalcy, is crucial for anticipating future energy market dynamics.
Lower demand and strong supply: The primary drivers behind the fall in energy prices are lower demand and a robust supply. Europe experienced two mild winters, which resulted in gas storage levels remaining high. With less pressure to refill storage during the summer, the supply situation improved significantly.
Increased LNG imports: Europe has ramped up its LNG import capacity, particularly through floating storage and regasification units (FSRUs). Last year, Europe imported record levels of LNG, with a significant portion coming from the United States. Drought conditions in the Panama Canal reduced traffic, redirecting spot cargos to Europe rather than take the longer route to Asia.
High Norwegian gas flows and strong French nuclear output: Record levels of gas from Norway and a robust French nuclear fleet have further bolstered the supply side.
Reduced winter LNG demand in Asia: Stronger nuclear and renewable energy outputs resulted in reduced LNG demand from major importers like Japan and South Korea.
Mild weather: Mild weather contributed to a 2% year-on-year drop in European gas demand for the winter of 2023-24, continuing the trend from the previous winter.
Despite these favourable conditions, energy prices remain above pre-crisis levels. This is due to several factors:
Fragile balance: The current balance of supply and demand is delicate. Any disruption, such as a harsh summer or winter, could quickly reverse the trend. A hot summer or a cooler-than-expected winter would increase energy consumption, straining supplies.
Supply-side risks: Potential disruptions in gas supply or nuclear output are significant risks. The energy market remains vulnerable to shocks, such as geopolitical tensions, technical outages, or natural disasters that could impact supply lines.
Spot market dependence: Much of the LNG imported into Europe recently has been procured on the spot market. This is less stable compared to the consistent supply of Russian piped gas prior to 2022. A shift in global market fundamentals, such as increased demand in Asia or outages in US LNG facilities, could leave Europe exposed until it secures more long-term LNG contracts.
Rising Asian demand for LNG, particularly from emerging markets. This will continue to influence global LNG flows and is particularly important considering Europe’s exposure to the spot LNG market. The next LNG supply wave is not expected until late-2025/ into 2026 and so increased competition with Asia for supply will keep European hub prices supported.
Active 2024 Atlantic hurricane season. This poses potential US LNG supply risks in the coming months. With several major LNG production facilities situated on the US Gulf Coast, associated damage to these facilities is a significant risk.
Russian piped gas flows. The end of the Russia-Ukraine gas transit agreement in January 2025. The end of the transit agreement is already largely priced into European markets. The lost supply could be replaced by alternative supply sources, however, if flows are cut ahead of this we could see a strong initial reaction from markets. In the longer term, increased call on alternative supplies will keep prices supported.
EU ban on re-exporting Russian LNG via Europe. Russia has consistently used this route to send gas into Asian markets. The alternative is a longer route through the Arctic Sea requiring specialised ice-class LNG tankers, which are in short supply thanks to existing Western sanctions on Russia. The sanction could remove more than 4bcm of supply into Asia before the next US and Qatari supply waves, tightening the global supply picture.
A progressive, flexible approach remains the best tool to reduce the risk of purchasing in a volatile market environment. For larger energy users, this can be achieved with a flexible energy contract and a comprehensive risk management strategy. Trident’s framework solutions provide a facility for purchasing energy flexibly for consumers who cannot access stand-alone flexible contracts. We operate a variety of risk strategies within our framework to cater for a range of risk profiles.
For customers requiring fixed contracts, preparedness will be key in order to secure contracts quickly if we see known, or unknown, risk factors materialising. Therefore, we would encourage these customers to issue their tenders to the marketplace now to streamline the process of accessing prices over the coming months.