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Will the fragile energy market balance survive the winter?

Over Q3 2022, the Ukraine conflict fueled oil & gas market dynamics.


2021 22Q1 22Q2 22Q3 22Q4* 2022
Crude Prices Brent ($/bbl) 70,9 92 118 116,7 98* 104,8
Rig Count World 1352 1669 1706 1828 - -
Demand (mb/d) Total 97,5 99,3 97,8 99,4 100,2 99,2
OECD 44,8 45,9 45,1 45,8 46,2 45,8
non-OECD 52,7 53,4 52,7 53,6 54 53,4
Supply Total 95,2 98,6 98,9 101,2 101,4 100,1
OPEP 31,4 33,8 34,1 34,9 35,7 34,6
non-OPEP 63,7 64,9 64,8 66,3 66 65,5
Excess (+) / Deficit (-) -2,3 -0,7 1,1 1,8 1,2 0,9

According to IEA projections, Brent price should stabilize after 2 months of a slight decline to reach an average of 98$/barrel in Q4 2022 and 97$/barrel in 2023. The risk of supply slowdown combined with slower oil production growth potentially creates higher prices. In contrast, current inflation and world economic growth potentially create lower prices which would neutralize the impact on the price of oil. 

The demand in 2022 is expected to exceed 2021, in the context of gas price inflation, electricity providers may reinforce the use of oil to provide energy. Demand and supply should maintain a positive level despite the start of the winter season over Q4. Crude oil inventories across Europe and North America remain at a low level and below the average of the last 5 years. 



Location Spot Price 16/09 This month future October Next month future November Next 2 coming months’ futures December
Henry Hub (US) [$/mmbtu] 8,81 8,06 8,10 8,26
TTF (Europe) [€/MWh] 214,28 190,50 203,92 206,80
JKM (Asia) [$/mmbtu] 53,51 - 45,00 49,01

Contrary to oil prices, natural gas prices are increasing tremendously and are affecting European countries especially. IEA projected an increase of Henry hub gas prices over Q4 2022 that should reach its highest in January 2023 (9,10 $/MMBtu). Prices should decrease progressively after this to reach reasonable levels (5,30 $/MMBtu projected for July 2023).

Graph of Oil & Natural Gas Daily Prices

Source: St. Louis FED, 2022, Bent & Henry Hub Natural Gas Daily price - Historical data

Global oil trends & the change in actors’ supply share for Western countries

Europe is trying to deal with these high energy prices and is counting on the support of other countries

During the OPEC and non-OPEC 32nd meeting on the 5th of September 2022, the need to support market stability was raised due to the decline in liquidity and increase in volatility. The readiness of OPEC+ to make immediate adjustments to production was highlighted as well as the means to deal with these challenges and provide guidance to the market. The decision to revert the production level of August 2022 for OPEC and non-OPEC countries for October 2022 was also taken.

Meanwhile, Saudi Arabia, a top producer of OPEC, announced at the end of August the possibility to cut production. This announcement is linked with the decrease in crude oil prices occurring since August as well as potential changes in suppliers for Western countries. Indeed, since June, Iraq is considering raising its exportation to Europe as the country has faced increasing competitiveness on the Indian market due to Russian and Asian crude. In addition, a potential nuclear deal between Western countries and Iran might also come soon. If a nuclear deal is reached with Iran, it could boost the oil and gas supply to western countries, as it will lift the sanctions taken toward the country and open up new possibilities for Iran’s exportation on the oil & gas market.

President of Russia, Vladimir Putin, also warned of potential exportation cuts to the West if a cap on Russian energy exports is imposed. Since the Russia-Ukraine conflict, Europe and the UK have decreased Russian oil supply by 880Kb/d, compensated by almost ½ (400 Kb/d) from the US supply and ⅓ by Norway (a 310 Kb/d increase). However, the UK has announced a stop in crude oil imports from Russia by the end of 2022 and total imports have already fallen by 27% since the pre-war level, highlighting Europe's dependence on Russian oil. 

If Saudi Arabia and Russia cut their exportation to the West, other suppliers will certainly not have the capacity to compensate at the same level for the delivery of oil (especially as Russia and Saudi Arabia are the main EU suppliers of crude oil). Indeed, European deals with Iran and Iraq are only at a premise stage and if future deals are confirmed, Europe can not realistically rely on those new supplies to compensate for the cut in deliveries from major suppliers. The increase in supply from the US and Norway is already at its highest. With the coming of winter, European countries will have to double their vigilance to maintain actual delivery levels and carefully deal with Saudi Arabia to avoid a sudden drop in supply.


Oil prices and demand have been challenged by the geopolitical and macroeconomic context

Even if oil prices are still at a high level, they have been decreasing continuously for two months. The price of crude oil dropped by 20% in August and reached its lowest price on the 7th of September (81,93$ for crude oil) since the Russian conflict began. 

This fall is explained by the Chinese economic slowdown, still impacted by covid-19 government restrictions, that will not recover to the pre-pandemic level before next summer, leaving oil demand for 2023 flat. In addition, inflation could impact oil demand, as it reaches almost double digits in many countries. Indeed, according to IEA data, year-on-year global demand growth slowed from 3,5 mb/d during the 1st semester of 2022 to 1,1 mb/d in Q3 and will be close to null in Q4 2022. Central banks might have to increase interest rates which could slow down economic growth and impact oil demand. 

Overall, IEA projections forecasted a downtrend in global demand over Q4 2022 since the Russian conflict started, which seems to coincide with the slowdown of prices. The risk of supply slowdown, positively impacting oil prices, combined with lower demand, negatively impacting oil prices, might stabilize oil prices by the end of 2022. 

However, on the 5th of October, OPEC+ announced a potential production cut of 2 mb/d from November 2022, which could once again change oil price projections. This production cut could outpace the low demand projection and foreseen Q4 excess of 1,2 mb/d could be revised toward a null (or negative) balance between supply and demand. Moreover, the demand slowdown outlook is limited to high gas prices that encourage industries to switch towards oil instead of gas (an impact estimated at +0,7 mb/d over Q4 2022 and Q1 2023 compared to normal seasonal trends).


Gas has become a top priority topic for European countries

Gas storage is more important than ever

Due to high political tensions between Russia and European countries, Russian pipeline flows of gas to Europe are now only a fraction of what they used to be in recent years. At the beginning of September, GAZPROM stopped the flow of gas for a few days, blaming repair issues at a compressor station. At the end of September, Nord Stream 1 and 2 pipelines were hit by rare gas leakage, compromising European gas sourcing. As deliveries have dwindled in the wake of the war in Ukraine, European dependence on Russian gas imports is more unpredictable than ever. 40% of gas consumed in the EU in 2020 was from Russian gas imports which have now been halved. 

Consequently, Europe is trying to store as much as possible before winter, by counting on strong LNG and non-Russian pipeline imports, as well as switching from gas to coal or oil in power plants and industry. Storage is also facilitated by high gas prices that mechanically pull the demand down. With around 888 terawatt hours (TWh) of gas now in storage, European gas storage levels surpassed 80% at the end of August. This is in line with their average over 2017-2021, and ahead of a deadline for the 1st of November set by the European Union to get to that level, according to data from Gas Infrastructure Europe (GIE). Yet filling continues ahead of winter to avoid industry shutdowns and power rationing. French storages are filled up to 90% and seeking to reach 100% before winter, for a total capacity of 130 TWh - that accounts for around ¼ of total gas consumption during winter, and covers 50% of needs during peak consumption periods. Germany, hardest hit by Russia's reduced gas flows and home to the largest storage capacities in the EU, has surpassed the 80% target as well but has also set a higher goal for itself, aiming to be 95% full by November.

This might not be enough to serve the European demand for the years to come

Nevertheless, it is not clear yet whether such increased storage capacity will be enough for this winter or the next. European gas shortages for years to come will depend on political factors, winter weather, demand shaving, and LNG imports. 

High storage this year has been done partly thanks to Russian gas - even if the flow was strongly diminished by the end of the summer. Without the increased flow of Russian gas through Nord Stream 1, the best-case scenario would have led to storage levels of 31% at the end of winter, in line with the five-year average. On the contrary, in the case of an extremely cold winter, the increasing need for heating across Europe and Asia could add up to 30 billion cubic meters (bcm). This would lead to a risk of reducing European storage inventories down to 4% by March and up to only 63% ahead of the start of winter in 2023, inevitably resulting in demand curtailments. 

That is why EU countries agreed in late July to cut their gas use by 15% this winter, from average winter levels in 2017-2021. That would leave post-winter storage 45% full if Russia kept sending gas, and 26% full if Russia cut flows from October. Germany for example has taken some measures to save energy: a ban on gas heating for private swimming pools, a reduction of the illuminations of public landmarks, and a ban on heated shops keeping their doors open all day. The French government, on the other hand, said we should not need to do rationing if companies and households are resilient. Sensibilization actions are taken to incentivize everyone to reduce their energy consumption. In addition, with those regulatory and political measures, high gas market prices will also continue to drive down European demand to seven percent below the five-year average through March.  

Finally, Europe’s hope to get through this and the next few winters is predicated upon record LNG imports - expected to reach a 40% market share in Europe next year, while Russia reduces its share below 10%. This requires gas prices to stay high (for LNG to remain profitable), and for Europe to remain an attractive LNG market for suppliers. Yet the whole LNG value chain is strained (with volatile prices, limited capacity production, and high demand). Recent high storage levels have led to LNG import issues, with tankers waiting for available slots to unload. In the absence of Russian flows in 2023, the tightly supplied LNG market will not be able to get Europe's storage facilities back to comfortable pre-winter levels.



What is Europe's leeway to control the price and traceability of purchased natural gas?

Europe has been trying to find viable alternatives to the energy crisis

A recent meeting with the EU energy Prime Ministers, aimed at finding reliable solutions for the upcoming energy crisis, delved into the possibility of enforcing a capping mechanism on Russian natural gas prices. But some countries relying massively on gas imports from Russia, such as Slovakia, Austria, and Hungary, disapproved of the measure, as it could harm their energy security.

But a price capping applied only on Russian gas would only slightly fix the energy crisis as Russia’s preponderance in European natural gas imports has massively declined since the beginning of the war. Thus, a general cap was discussed, but this decision would lead to a weakened energy supply for Europe, especially in the context of strong competition with Asia. The last relevant option would be capping the electricity prices to impact the consumer bill more directly, but the remaining question is the scope of power plants which should be concerned. As natural gas is the main driver of wholesale electricity price, considering gas power plants in the scope of application could optimize the efficiency of the measure.  

This situation has pointed out the difficulty for Europe to speak as a unique block: countries have been experiencing different energy mixes and now have divergent interests. The European capacity to pursue the natural gas consumption decrease and to maintain flows in a context of high competition will determine the severity of the energy crisis during this winter. Negotiations will be resumed in the coming weeks, with a potential final decision on the price capping topic.

However, it seems difficult for Europe to bypass the market rules and issues persist

In the context of reduced pipeline imports from Russia, LNG flows have been on the surge, with demand mainly driven by Europe and Asia. Nevertheless, LNG is more expensive and infrastructure challenges persist to consider it as a reliable alternative in the long term. 

LNG’s recent surge brought Asian countries to the forefront of the energy flows; Asian countries have managed to secure their supply with Russia through long-term contracts and Russia has been able to step up its strategic shift from the West to the East. In addition to the forward market, Europe has been substituted by Asia on the LNG spot markets. It turns out that China has been buying a lot more LNG than needed for its domestic consumption, and now resells the additional cargoes to Europe and benefits from the gap between purchase and sale prices. 

This new type of organization is pointing out the long-term capacity of Europe to boycott Russian energy resources: the current market structure has asserted Asian countries’ intermediary role in energy flows and Europe is now trying to deal with this new paradigm.


In conclusion, since the beginning of the war and the energy crisis that has occurred in parallel, Europe has been trying to become as less dependent on Russia as possible. This geopolitical event has been a milestone for European-Russian relations and the coming months will determine the setting of the future European energy supply system.

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