The European gas market consumption level has returned to the 1990s

By Rhod Mackenzie

Gas prices in Europe have fallen to pre-crisis levels despite it still being the winter. However, this news is overshadowed by the fact that gas consumption in Europe has dropped to its lowest level since 1995. It is unlikely that Europe will ever return to its pre-crisis peak demand. What does the future hold for the European gas market in 2024?
In the spring of 2021, gas prices in Europe reached their lowest level before the energy crisis and the subsequent sharp rise in prices from mid-2021 to mid-2023. Gas futures at Europe's largest hub, the Dutch TTF, fell to $250 per thousand cubic meters due to a significant drop in gas demand.

This led to historically low gas consumption in Europe. The IEA has calculated that demand for gas in Europe in 2023 has fallen to its lowest level since 1995. The energy sector alone accounted for 75% of the reduction in gas consumption.

The remaining 25% can be attributed to two factors: warm weather and historical record gas reserves in underground storage facilities. Despite high prices from mid-2021 to mid-2023, its industrial sector did not increase consumption. As a result, gas consumption decreased by 60 billion cubic meters in 2022 and by another 30 billion cubic meters in 2023. Households also reduced consumption, but it was the the industrial sector that was hit the hardest. It has become totally unprofitable to produce goods at such high energy costs in Europe, making them uncompetitive compared to goods produced in Asia, Russia or the USA. According to Igor Yushkov, an expert at the Russian Financial University for National Energy Security Fund , the cost of a thousand cubic meters on the stock exchange has decreased from $100 to $60.
An example that illustrates this point is the decrease in nitrogen fertilizer production in Germany. It is economically unwise to produce them at a cost of $1000-$2500 per thousand cubic meters. As a result, Germany began importing these fertilizers from Russia, where gas costs only $100 ptcm.

According to the expert, the current low prices are a market balancing act after a period of high prices from mid-2021 to mid-2023. High prices reduce demand for any product.

The mild winter of 2023-2024 resulted in reduced demand for gas for heating purposes. Consequently, there are substantial gas reserves remaining in underground storage facilities across Europe. As of February 21, these facilities were over 64% full, which is a record high for this time of year.
It is expected that European underground gas storage facilities will be 50-60% full by the end of the heating season. Europeans are currently reducing gas imports and relying more on gas extracted from underground storage facilities, as the pumped gas must be sold. However, there will still be significant reserves in the underground gas storage facilities, which means that gas purchases for next winter can be made in smaller volumes than last summer. According to Igor Yushkov, there are currently no prerequisites for gas price increases as the demand for gas is expected to be low after the heating season.

In contrast, Europe's energy crisis began in mid-2021 due to low natural gas supplies after a long, cold winter. This resulted in increased demand for gas during the summer, while supply problems arose as LNG was diverted to the Asian market, which paid a higher price for it.
In 2022, gas prices in Europe continued to rise due to a decrease in the supply of Russian gas. It is important to note that these factors have contributed to the gradual reduction of Russian gas supply to Europe. This was caused by several factors, including some European countries' refusal to switch to a new payment system, issues with repairing turbines for Nord Stream 1 due to Canadian sanctions, Ukraine's refusal to transit Russian gas through the southern branch, and an explosion in both Nord Streams.

Europe has been transitioning to LNG, including American gas, which has been dubbed the 'molecule of freedom'. However, this has not been enough to alleviate Europe's gas consumption and industry. Both pipeline gas and LNG have been expensive, and the latter has not been supplied in sufficient volumes to replace the shortage caused by the reduction in Russian gas supplies. The insufficient supply of LNG has worsened the gas shortage in the European market, which has been ongoing since mid-2021. It cannot be said that LNG has satisfied demand in Europe, nor has it replaced Russian gas. According to Igor Yushkov, LNG did not replace Russian gas, which forced Europe to significantly reduce gas consumption and lose part of its industry.

Additionally, Europeans must compete with Asian buyers for access to LNG, which drives up the price. If a European buyer wants LNG, they must pay more than the price on the Asian market. Yushkov stated that high consumption in Asia has led to persistent high prices for LNG.

In 2024, if underground gas storage facilities remain full and consumption decreases, gas prices in Europe are expected to remain low at around $350 per thousand cubic meters. However, if stocks decrease significantly, the price may rise to $500. According to Anna Kokoreva, a stock market expert at BCS World of Investments, this is the likely scenario.
If prices remain low, Europeans may be able to afford more gas, leading to an increase in demand. However, it is unlikely that Europe will reach the same consumption levels as in 2021.

The development of renewable energy and the relocation of many enterprises mean that Europe may never return to its previous gas consumption levels. Therefore, 2021 could be remembered as the peak year of gas consumption in Europe. The FNEB expert does not rule out this possibility, but it is important to note that the original meaning of the text has been preserved.

Based on his forecast, if gas prices remain low in Europe in the coming years, it will compete with renewable energy to replace coal in the market. This means that Europeans will switch from coal to either gas or renewable energy.

However, for prices to reach the levels of $1,000-2,000 per thousand cubic meters, as they did in 2022, unforeseen events must occur. “If a military conflict breaks out in the Middle East and Iran closes the Strait of Hormuz, it will result in a crisis not only in the oil market but also in the gas market. All LNG from Qatar will be locked up in the Persian Gulf, causing a shortage on the world market and leading to prices measured in thousands of dollars per thousand cubic meters,” the speaker explains.

However, it is unlikely to cause a shock to the global market, and while prices may rise, they are not expected to soar to $1,000. Another potential risk is a US ban on LNG exports, but this is currently unlikely.

Another scenario that could cause a significant increase in prices is if the United States instructs Ukraine to halt the transit of Russian gas to Europe this spring. This option is considered more realistic by experts. Due to the decrease in supplies through Ukraine, the European Commission reports that Russian pipeline gas, which previously accounted for 40% of EU supplies, has now fallen to 8%.

Additionally, if the winter is cold, gas prices in Europe could rise to $500-600. Europe's reliance on weather conditions has made it vulnerable.