Economy

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Watch as our economists analyse the current state of the economy and markets.

The end of the energy crisis is not yet in sight

Thanks to some favourable factors, such as the mild weather and reduced LNG imports from China, the pressure on the gas market has eased somewhat. Gas prices are currently well below their peak levels of a few months ago. However, it is far too early to conclude that the worst is over. Once temperatures drop, the situation could deteriorate rapidly. The gas market will continue to be very tense over the coming years. The International Energy Agency (IEA) recently warned of a gas shortage in Europe next winter.

Charlotte de Montpellier, Senior economist, explain the situation on the gas market and on the energy prices.

Due to the very mild weather, storage capacities are still quite full

At present, gas prices are well below their peak levels, but these figures should not lead to overly optimistic predictions for the future. Several factors have indeed offset the reduction in Russian gas supplies. For example, Europe has had its warmest October on record, with average temperatures almost 2 degrees higher than the average since 1990. Last month, daily temperature records were broken in several places in Western Europe, in Austria, Switzerland and France, as well as in large parts of Italy and Spain, where October was the warmest October on record. The only places in Europe where October was colder than average this year were some Greek islands and Iceland. The first half of November was also milder than usual, which further delayed the start of the heating season. These temperatures are exceptional and we must consider that the heating season could start much earlier next year. Full inventories also reduced pressure on the gas market. Gas storage capacity in the EU is now 95% full, 5% above the five-year average. In Germany, gas storage capacities are even better at 99.5% full. But we have to bear in mind that in 2022 these storage capacities were mainly filled with Russian gas before exports stopped. For example, 30 billion cubic metres of Russian natural gas were delivered to the EU through pipelines this year, a source that may disappear next year. Moreover, there is little scope for increasing supply from non-Russian pipelines: Azerbaijan and Norway are already close to their maximum capacity this year. In the case of Algeria, a limited increase is expected due to the development of new gas fields, but this will be far from being able to offset the lack of Russian supplies.

The decline in Chinese LNG demand has also provided some relief this year

In the first nine months of 2022, Chinese LNG imports fell by 21% compared to the same period last year, due to slowing economic growth and several localised lockdowns. However, a rebound in the Chinese economy could bring Chinese LNG imports back to 2021 levels in 2023. This could significantly reduce the amount of LNG available for the European market. In addition, China has pursued a vigorous LNG policy in recent years, which has enabled it to put in place a large number of "fixed destination" LNG contracts, effectively giving it a preferential right to more than half of the expected increase in global LNG supply in 2023. In short, Europe has already had to compete fiercely with Asia for these additional LNG ships this year and the competition promises to be even fiercer next year.

Europe could face a gas shortage in 2023

This shows that Europe is not yet out of the danger zone and that there will be a high risk of gas shortages in the coming winters. In a report published in early November, the International Energy Agency (IEA) warned that Europe could face a gas shortage of 30 billion cubic metres, or 13% of total gas demand, next summer. In this analysis, they assume a complete shutdown of Russian gas supplies, a return of Chinese LNG imports to 2021 levels, an 11% drop in EU and UK gas demand compared to the five-year average between November this year and March next year, and the fact that European gas stocks will be around 30% full at the end of this winter. According to these assumptions, we will experience a significant gas shortage in the summer of 2023, when gas stocks will need to be replenished. This will put enormous pressure on prices next year. 

Futures contracts are already taking increased gas scarcity into account

All these uncertainties are leading to high volatility in gas prices on world markets. These have now temporarily dropped a little, but this could change again soon. On the markets, the one-month forward price is already much higher because the market is already expecting a much higher demand for gas next month. For 2023, the forward price is currently €123.5 per MwH, and we believe it could even go much higher. Replenishment will be much more difficult next year, given the reduction in Russian supply. If Russian gas supplies remain as they are now, this would mean a 60% year-on-year decline next year. And, of course, there is a risk that other flows will also come to a complete halt. The market is already expecting serious supply problems next year, which is why the forward gas prices for next year are much higher than the current prices. 

The oil market will also be under pressure

The outlook for the oil market changed significantly last month following OPEC+'s decision to reduce its production targets. These reductions will take effect in November and last until the end of 2023. However, given that most OPEC+ members are already producing well below their target levels, the group's actual cuts will be much smaller than those announced. Nevertheless, this decision comes at a time of great uncertainty about Russian supplies. The EU ban on imports of Russian oil by ship comes into force on 5 December, followed by a ban on Russian refined products on 5 February. So far, Russian supply has held up well, largely thanks to India, China and a handful of smaller buyers who have started to buy more Russian oil, but it is hard to imagine that they will be able to increase their purchases further. Therefore, when the EU bans come into effect, we can expect Russian supply to fall more sharply. Consequently, the oil market will be very tense next year, especially if Chinese demand accelerates. Although there is still a lot of uncertainty about China's zero covid policy and the strength of a possible rebound, it is thought that China will account for almost 50% of global oil demand growth next year. As a result, oil prices are likely to be higher in 2023.

Energy markets will remain extremely tense next year

In our baseline scenario, we assume that the oil market stays tense due to the OPEC+ quota cut and the EU ban on Russian oil, which will lead to higher prices. In addition, the gas market will also remain extremely tense next year and a reduction in demand is likely to be required to get through the winter months. Prices could rise even higher than current prices if Chinese demand picks up strongly, forcing us to compete more aggressively with China for LNG capacity.

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