Gas prices in Europe posted their biggest weekly drop since 2007, with demand remaining subdued as the economy slows under the weight of rising borrowing costs and stubbornly high prices across many sectors.
Benchmark futures fell 4.7% on Friday, marking an eighth consecutive week of declines. Since the beginning of the year, the decline amounts to 66%.
In particular, Dutch TTF prices for the first month traded at €25.34 per megawatt-hour, having hit the lowest level since May 2021. The corresponding UK contract rose 1.1%. Electricity prices in Germany for the next month have changed little.
Concerns about demand
The emerging situation, however, raises concerns about demand, with several market participants concerned that some of this demand may have been permanently lost or replaced, as last year’s record prices hit manufacturers particularly hard.
And of course, with full storage at record levels, mild weather and an abundance of liquefied natural gas, there are reasonable questions about whether prices will drop before producers start cutting production.
A look at winter
According to Bloomberg, several traders are trying to predict how weak demand could affect prices as winter approaches. Energy Aspects Ltd. points out that Europe will struggle to absorb gas supplies from September to October if the pace of injections remains fast enough to push the region’s reserves above 100 billion cubic meters by early September.
The German recession
Another worrying parameter is the German economy, which has sunk into a technical recession. China’s weaker-than-expected economic recovery is also weighing on prices, with the country’s largest LNG importers conspicuously absent from the spot market.
The warehouses are full
According to the Aggregated Gas Storage Inventory (AGSI+), the occupancy rate of natural gas storage facilities exceeds 66%, about 25 percentage points higher than the average of the past five years. The natural gas storage rate is the highest for this time of year in at least a decade.
High pre-summer inventories and weak demand suggest that the worst of Europe’s energy crisis may be over.
But analysts and officials warn the EU should not be complacent ahead of the upcoming winter season.
Dependence on Russia
It is recalled that on Thursday the European Commission announced that the EU was no longer dependent on Russian energy supplies, after having succeeded in quickly finding alternative producers (mainly liquefied natural gas), achieving savings in consumption and accelerate the introduction of clean energy sources.
Natural gas consumption in Europe between August 2022 and March 2023 was 17% lower than the average for the same period of the previous five years.
And analysts say Europe can weather another winter without major repercussions if it is careful.
Russia and Azerbaijan
As gas prices fall in the EU, the continent is rushing to diversify its imports.
And while Russia is trying to redirect its exports to Asian consumers, Europe has increased its gas imports from Azerbaijan.
How Azerbaijan Is Helping Europe Wean Off Russia – Greece’s Role
Natural gas supplies from Azerbaijan to Europe via the Trans-Adriatic Gas Pipeline (TAP) amounted to 2.9 billion cubic meters in the first quarter of 2023. Although this makes Azerbaijan a relatively small supplier to the EU, the total volume supplied in 2023 is higher than in previous years. In 2021, Europe received 8 billion m3 of natural gas from Azerbaijan, which increased to 11.4 billion m3 in 2022.
According to Caspiannews.com, Azerbaijani President Ilham Aliyev said his country plans to increase supply from around 12 billion m3 this year to around 20 billion m3 in 2027.
In July 2022, the European Commission and Azerbaijan established a strategic partnership in the energy sector by signing a Memorandum of Cooperation.
According to the provisions of this memorandum, Azerbaijan is committed to doubling its natural gas exports to the European Union. In the memorandum of understanding, the two parties also raised the issue of renewable energies, in particular wind power and green hydrogen. The EU believes that Azerbaijan could become a strategic partner in the field of renewable energies in the long term while strengthening its role as a supplier of natural gas in the short term.