Energy Focus - Winter 2022-23 Outlook

Demand

Gas and power demand will play a significant role in price direction over the winter months. Much of this will be driven by the weather. La Nina, in the southern Pacific Ocean, is expected to persist until February. La Nina events correlate with cooler weather in the Northern Hemisphere, with the strongest effect seen over North America and Northern Asia.

Exports will continue to add to the demand picture as the UK is currently set to remain a net power exporter to France until June 2023. Price spreads between UK and European gas hubs continue to incentivise gas exports to Europe and this pattern will almost certainly persist over winter.

Supply

Efforts to shore up gas supplies on the continent appear to be paying off with healthy European storage levels at the start of winter. Aggregated European gas storage has surpassed 90% fullness.  Increased Norwegian flows, and Europe’s ability to attract LNG cargos with high TTF prices, have helped the effort. Prices will need to remain at a premium to keep attracting LNG to Europe, as only around 30% of global LNG cargos are available to the spot market.

An additional 18 bcm of LNG is expected to arrive into Europe this winter. Increasing US LNG output will play a large role in this increased supply. Increasing US LNG output is driving US gas prices higher. Cooler winter weather in the US could push these prices even higher, and it remains to be seen if domestic price increases would impact US exports. Chinese LNG demand decreased by 22% between June and September but this could quickly change as a cold winter in Asia could increase gas demand by 9bcm.

Healthy nuclear availability in the UK is expected over the winter period. EDF, Drax and Uniper have all agreed contracts with National Grid to provide additional coal generation capacity, if required, this winter. In its recent winter outlook, National Grid expected adequate system margins this winter but did warn of potential for blackouts in the extreme circumstances modelled.

On the continent, French nuclear capacity is expected to increase steadily over winter. Ongoing strikes, and unexpected delays or outages, remain risk factors for returning capacity. Germany recently agreed to extend the life of some nuclear plants in order to help bolster European power supplies. 

Geopolitical Risk/Europe plans

In our previous report, we discussed the potential impacts of zero Nord Stream flows. In August, we saw this scenario emerge and prices reach record highs. The market remains sensitive to developments on the conflict. Recently, we saw UK gas markets spike 80p/therm in minutes following news of Ukrainian power outages. The gains were lost within the hour, but this highlights the potential for further volatility in the coming months.

The likelihood of Nord Stream 1 returning this winter remains minimal following damage sustained from recent explosions. This presents significant supply risk this winter, but also for winter 2023 as Europe will face its first summer replenishing gas storages without Nord Stream, a 39bcm deficit yoy. Flows via Ukraine and Turkstream continue, however, the ongoing spat between Gazprom and Ukraine’s Nafotgaz, regarding transit fees, continues to fuel fears of a complete supply cut off.

The EU recently agreed on measures to tackle high European energy costs including a windfall levy on non-gas power generators and mandatory demand cuts. The contentious topic of a gas price cap is still under discussion. With some large players, strongly opposed to any cap the EU will meet this week to discuss the plan further. The UK have also proposed capping renewable energy prices, but very little detail has been provided to date.

Wider Energy Complex

Global economic growth has entered a period of significant uncertainty and weakening macroeconomic conditions. The oil market has lost 40% of its value since early March. The value of the U.S dollar has appreciated to the highest level in over two decades adding pressure to commodities priced in dollars. 

Demand concerns have superseded supply issues with global demand only expected to grow by 2.6mbpd due to Chinese lockdowns and inflationary pressures. However, oil price declines have been limited by expectations of rising gas-to-oil switching during the winter period in both Europe and Asia.

The carbon market has depreciated by 35% since reaching an all-time high in mid-August. Losses have been driven by a recent return in auction supply, warm weather, and recession concerns. Discussions continue on potentially using the ETS to fund the EU’s REPowerEU plan. Proposals include the sale of EUAs held in the market stability reserve and front-loading permits, however, the EU parliament and council are keen to shield the Market Stability Reserve to safeguard the integrity of the EU ETS. Looking forward the forecast EUA price for 2023 is expected to average €70/tonne.