Gas prices will not return to pre-energy crisis levels for another three years despite the recent drop-off across wholesale markets, warns investment group Stifel.
Managing director Chis Wheaton told City A.M. that a return to formerly established prices in the UK when gas traded at around 40p per therm would require a vast hike in liquefied natural gas production, with Europe now reliant on tankers from the US to meet its energy needs.
LNG is is natural gas that has been reduced to a liquid state, through a process of cooling before it is later converted back into a gas for use.
The UK and Europe has relied on shipments from the US and Qatar to meet its energy needs over the winter.
Wheaton calculated that Europe requires 125m tonnes of LNG to replace the natural gas resources Russia was supplying by pipeline prior to the invasion of Ukraine, before its throttling of supplies in response to Western sanctions.
He said: “It will take until at least 2026 to return to close to pre-crisis levels. This is because there is limited additional supply of LNG in the near term, as it takes three to four years and £640m to add one million tonnes per year of LNG supply, so it can’t be delivered immediately.”
UK gas prices climbed to a record high of nearly £8 per therm last summer following Russia’s invasion of Ukraine – with Western sanctions and a Kremlin-backed supply squeeze raising fears of supply shortages on the continent.
The benchmark was already operating at historically elevated levels after the collapse of dozens of domestic energy suppliers amid rebounding demand from the pandemic.
This has been felt in consumer’s wallets, with households bearing the brunt of record energy bills and sky-high prices at the petrol pumps amid a cost of living crisis.
While Europe used less gas last year, reducing demand across the continent by the equivalent of 40m tonnes of LNG, Wheaton argued there was still a supply-demand gap of 85m tonnes of LNG in new gas supplies required, alongside the infrastructure such as port facilities and pipeline to import it.
UK prices are hovering at £1.14 per therm ahead of trading yesterday, having dipped below £1 per therm earlier this month, according to the UK Natural Gas Futures benchmark
Prices were trading 12.4 per cent down at close of play on Tuesday, while futures contracts for June and July were down 12.1 and 12.0 per cent respectively.
Markets have eased with European storage levels, which are still topped up at 55 per cent of capacity across the EU according to AGSI data, and warmer early spring weather.
Wayne Bryan, director at Refinitiv Gas Research, was optimistic Europe could further reduce its reliance on Russian supplies – and that the latest movements in prices are less important to the wider positive factors at play in the market.
He told City A.M.: “Although gas prices have fallen recently, the market situation is in full contrast to a year ago. Storage levels are healthy, and prices are down to 20-month lows, bringing confidence that dependency on the Russian “gas needle” is possible to overcome.
Wheaton highlighted that European gas prices are now linked to Asian LNG prices, as Europe is so reliant on LNG to replace Russian gas.
“Europe’s gas price has to be price-competitive with Asia, which is the other big LNG consuming region. China is only just starting to recover from the Covid shutdown of its economy, and other Asian LNG consumers do not want to buy expensive LNG, so LNG prices in Asia are also still – gently- falling. This is therefore helping to keep European gas prices falling too,” he concluded.
In terms of headwinds, Bryan argued the main challenges concerned market fundamentals, and countries beyond Europe’s borders.
He said: “Europe is almost out of the woods, but not completely, with some vulnerability remaining and the pace of demand destruction and resumption of Chinese demand remain chief uncertainties.”