The energy crisis: a change in the zeitgeist

Europe will hit a new milestone in late 2024 once it survives its first winter without Russian natural gas pipeline supply, yet in this "new normal" prices will be persistently volatile and prone to sharp spikes, as the market is left at the mercy of LNG supply, unlikely ever to regain pre-crisis stability.

Natural gas, power and LNG prices in Europe, the US and Asia have stepped way down from pre-Ukraine war levels in recent months, indicating that the crisis that started in late 2021 may be retreating.

Read more: Europe's energy price crisis

"Crisis to me implies an extreme, temporary event and while we are still in a world where the effects of the crisis are being felt, and will continue to be, it feels like we have moved out of the crisis phase and into the adjustment phase," said Glenn Rickson, S&P Global Commodity Insights head of European power analysis.

Prices ease globally

The front-month natural gas price on the benchmark Dutch TTF hub averaged over 70% lower on the year in June and was trading at a similar level in July so far, despite the rally in the first half of June. In power, the corresponding contract in Germany – the biggest European electricity market – was 58% lower in June 2023 than in the year-ago period.

Similarly, Asian spot LNG prices, including Platts JKM, Japan Korea Marker, and WIM, West India Marker, moved down significantly in H1 2023, with JKM falling to a two-year low of $8.3/MMBtu and WIM at $7.9/MMBtu on June 7.

Platts DES Northwest Europe Marker (NWE) also fell to $6.916/MMBtu on June 1, as a warmer-than-expected winter, higher gas and LNG inventories in Europe and North Asia and greater nuclear and renewable output from Europe, Japan and South Korea kept a lid on prices in the first half of 2023. While spot buying from India had begun with multiple buy tenders awarded, and a handful of opportunistic purchases from Chinese buyers happened when prices fell to below $15/MMBtu, procurement activity from North Asia remained relatively lackluster.

Moreover, power prices in all the major US markets have edged lower so far in 2023 compared with 2022, largely because of weaker natural gas spot prices and stronger renewable output. Lower natural gas prices were driven by strong domestic production and lower-than-usual storage withdrawals due to a milder winter, resulting in surplus stocks and lower consumption.

'New normal'

The curve structure on the Dutch TTF hub indicates that traders are pricing in more comfortable conditions for the end of 2024.

The curve is largely in steep contango until Winter 2024, because of ample risk premium built into months with strong heating demand in case of a prolonged cold spell and supply disruption, especially for the first quarter of 2024. And the TTF curve mostly turns into a healthy backwardation from Winter 2025 onwards, suggesting market participants are expecting trading to normalize.

Yet, there is strong consensus in the market that Europe's energy problems will not entirely be over even by late 2024 or early 2025, since fundamentally nothing will have changed, and Europe will rely heavily on LNG supply for years – if not decades – to come.

"I think the worst of the crisis is behind us, but we are entering a new normal... from second half or late 2024," a gas trader operating in Northwest Europe said.

"There is a change in the zeitgeist, the paradigm has changed. [The crisis] is mutating as the recent turmoil in the market [in June] has shown. Market participants are still very much on the edge, as we don't have the same cushion of pipeline gas," the trader added.

Indeed, Russia's giant Gazprom has lost most of its European market share since the start of the Ukraine war and is highly unlikely to regain it even in the case of armistice. Market participants agree that the West would not trust Russia again as a reliable partner, especially since new LNG infrastructure is being built across Europe.

Meanwhile, big demand spikes throughout last year and sharp price moves, at times driven by market sensitivity, led traders to somehow adapt to the extreme volatility and the persistent possibility of higher prices.

"We will be in a much higher-volatility price environment for the foreseeable future. What I do think will change – and in fact already largely has – is how people react to high prices. No-one panics when we go from Eur30/MWh to Eur50/MWh," a gas trader based in Germany said.

Looking ahead

In the short- to mid-term, supply and demand in the gas and power markets look well balanced.

"The power market is certainly in a healthier position than last year – improved French nuclear running, higher hydro stocks, renewable capacity growth and structurally lower demand. All serving not only to lower power prices but also help [bring down] gas prices through lowering power sector gas demand," S&P Global's Rickson said.

Looking at Asia, extended maintenances in the Atlantic and heat waves in south China and other parts of Asia for the rest of summer could drive up incremental LNG demand from Europe and peak shaving demand in Asia respectively.

Furthermore, additional pockets of LNG demand could arise in the second half of 2023 from new LNG importers like the Philippines, Vietnam, Hong Kong, and new receiving terminals starting up in China such as Suntien Green Energy's Tangshan LNG, Guangzhou Gas' Guangzhou LNG, and Zhejiang Energy's Wenzhou LNG.

In the US, natural gas prices throughout the year are expected to remain over 50% lower than in 2022, US Energy Information Administration data showed.

Other trends include a growing renewable fleet across the country, with California and Texas currently leading in solar and wind production, and some Central states following closely. In the US Northeast and Mid-Atlantic, fossil fuels, such as coal and natural gas, continue to play the most prominent role. However, the regional fuel mix is changing gradually, as states pursue their aggressive Renewable Portfolio Standards (RPS) goals.

Despite lower fuel prices and some relief from growing renewables, extreme weather events continue to pose risks to North American power markets. Heat waves and cold snaps increase pressure on the grid, causing periods of supply uncertainty and price volatility. For example, due to an early-summer heat wave in Texas the ERCOT North Hub on-peak locational marginal price shot up to $800/MWh on June 20, the highest price since the Christmas 2022 cold snap, falling to $262.05/MWh on June 21 and $48.45/MWh on June 22, ISO data showed.

With global energy markets now closely interconnected, any extreme event in Asia or the US is likely to have an impact on Europe, and vice versa, triggering yet another price rally.

"'New normal' is where prices can fluctuate by a factor of five and this being normal and understandable. Once the first winter without Russian gas is over, we'll officially be in a 'new normal', but obviously that's not fundamental," the Germany-based gas trader said.

What is certain is that the crisis has reshaped the global energy sector permanently, and Europe will now compete with Asia for LNG supply on a much larger scale than ever before, with previously reliable Russian pipeline supply completely absent. But the market will be far more prepared for any uncertainties, and better equipped to deal with them.

Additional reporting by Shermaine Ang and Daryna Kotenko