Written for Wiley in Mid-December.
The northern hemisphere experienced its warmest October and November on record (dating back to the 1880s) – significantly reducing gas demand for space heating and power generation, and triggering a slump in prices.
Northern hemisphere land temperatures were 2.61°C above the long-term seasonal average in October and 3.04°C above the seasonal average in November – well above the previous records of +2.04°C for October (2021) and +2.48°C for November (2020), according to the U.S. National Oceanic and Atmospheric Administration (NOAA).1 This cut the need for heating across many countries, reducing demand for gas and causing a slump in prices – despite the ongoing reduction in Russian pipeline exports to Europe.
At a regional level, The NOAA said Europe experienced near-record warmth in October, and North America experienced near-record warmth in both months. In Asia temperatures anomalies were highest, with record warmth in both October (+2.76°C) and November (+3.14°C).
The record temperatures extended the gas storage refill season in Europe and the US much later than usual and delayed the onset of the winter drawdown. In Europe, storage levels were already high because exceptionally expensive gas had put off buyers earlier in the year, while a warm winter in 2022/23 had also cut demand. Heading into this winter, European inventories totalled a record 1,095TWh on November 30 – or over 95% full, compared with the 10-year end-November average of 83%. In the US, inventories in underground storage reached 3,736bn ft3 – the highest since 2016 (not including the covid year of 2020), amid record production levels and strong demand from power generators.
By the middle of October, gas prices started to weaken, and this accelerated in December. In northwestern Europe, futures prices for peak winter deliveries in January 2024 slumped from an average of €52/MWh in October to a low of €33/MWh in December. Platts assessed its daily northwest Europe LNG price benchmark for cargoes delivered in January at $10.367/mn Btu on December 14. The next day this fell to $9.763/MMBtu.2
US gas dropped from a peak of $3.60/mn Btu mid-autumn to $2.23/mn Btu in the week before Christmas. And in northeast Asia LNG prices slipped from $17.31/mn Btu in October to $15.50 in early December. By mid-December, Asian prices had hit a four-month low, despite a cold snap in China, with LNG for January delivery slipping 18% to $12.70/mn Btu from the week before, while the average LNG price for February delivery (NE Asia) was estimated lower still at $11.90/mn Btu.
Other weak fundamentals and bearish outlook
In the US, prices are also under pressure from record shale gas output in the Permian basin and new pipelines bringing it to market, while in Europe, LNG supplies are plentiful and pipeline flows are healthy from Norway and stable from Russia via Ukraine. There had been questions about renewing transit arrangements with Ukraine for Russian gas, but they appear to have been resolved at least temporarily. Norway has an additional 400-500mn ft3/d in gas supply capacity for periods of high demand. North African supply from Algeria is also steady, and Azerbaijan’s gas exports to Europe will rise to 12bn m3 this year from 8bn m3 in 2021, with a plan to increase supplies to 20bn m3 by 2027.
In addition, strong winds in Europe have been driving down demand for gas-fired power generation, with the UK alone now regularly breaking 15GW of wind output – half the country’s total power demand. For example, peak wind power generation was forecast at 15.7GW on December 18, according to Elexon data3, rising to 17.8 GW the next day, from a total metered capacity of about 23 GW.
Although European gas storage has fallen through the early winter weeks, the continent remained comfortably stocked at the end of December, provided there is no major prolonged cold snap or interruption to supply. Gas storage levels in the EU were slightly below 2019 just before Christmas, but still high for the time of year at 87.1% – down 5.6% in three weeks. Continued mild and windy weather could mean Europe ends the heating season with relatively high storage levels, which would put downward pressure on prices next spring and summer as the need to replenish stocks is reduced.
Mid-December long term forecasts suggest Europe should be milder than average this winter, and mild conditions are also expected to persist in the US due to strong El Niño conditions. However, the recent fall in prices could slow output in the US and encourage more consumption by power generators and industrial users, especially in Europe, which should support the market.
Longer term, upstream investors may question the robustness of winter demand forecasts in the face of accelerated global warming.
References
1. https://www.noaa.gov/news/earth-had-its-warmest-november-on-record
2. https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/lng/121823-european-delivered-lng-in-december-up-to-704-million-mt
3. https://www.bmreports.com/bmrs/?q=eds/main