West needs to prepare for energy crunch next winter, analysts warn
Experts have urged the West against complacency after staving off blackouts this winter, warning that the energy crisis could last for years to come.
Nathan Piper, head of oil and gas research at Investec told City A.M. that gas markets are still pricing in disruption to supplies, with futures contracts remaining well-above pre crisis norms later this year.
He said: “The challenge of ensuring enough gas supply will re-emerge later this year as we move into next winter, which is underlined by the current forward curve where prices are expected to increase again later this year.”
First quarter contracts in 2024 on the UK benchmark are currently trading at 1.85 per therm, above current spot prices which are currently hovering just under £1.50 per therm – having dropped as low as £1.38 per therm in January.
Prior to Russia’s invasion of Ukraine, gas prices were conventionally trading at 45-50p per therm.
Piper argued that the UK and European Union (EU) benefited from a warmer than expected winter, which eased demand and reduced the prospect of higher prices and a supply crunch.
But Piper said this was something that couldn’t be banked on over the coming winters amid a sustained energy squeeze from the Kremlin.
“The fundamental security of supply fear has now eased, helped by milder than expected windy weather and high storage levels. This has taken the extreme risk premium out of prices, short term,” he argued.
Craig Erlam, senior markets analyst at OANDA argued next winter could be challenging for the West.
“There are some factors that could change that including Russia cutting remaining supplies to Europe, the weather necessitating above normal usage and China’s economy recovering much stronger and faster than anticipated,” Erlam told City A.M.
“The last point could also be true of the global economy but I think a strong China bounce back is more likely,” he said.
The UK has managed to avoid blackouts over Christmas, but last month it did trigger its demand flexibility service over two days, with millions of households volunteering to cut their energy usage at peak evening times in exchange for discounts on their bills.
Meanwhile, continental Europe has been highly dependent on costly liquefied natural gas imports, chiefly from the US and Middle East to top up capacity and meet energy demand.
Think tank Bruegel last week called on the EU to continue reducing gas demand ahead of next winter, to ensure storage can be re-topped at 90 per cent capacity.
The latest data from gas index AGSI puts storage levels at an average of 71 per cent across the bloc.