Column by Yuri Barsukov on how falling gas prices could result in a new rise in prices

Two years have passed since spot gas prices in Europe reached a previously unimaginable value of $3,800 per 1 thousand cubic meters. m. For comparison, in energy equivalent, this corresponds to an oil price of $625 per barrel, which is approximately four times more than the historical peak of oil prices in May 2008. The shock that large gas importers, primarily European, experienced in the spring of 2022 can only be compared with the consequences of the Arab oil embargo of 1973.

But after some two years, the price of gas on the European market has completely returned to the long-term norm: now, at the end of the heating season, gas costs about $300 per 1 thousand cubic meters. m, approximately the same as in 2012–2014. Then, ten years ago, some consumers in Europe considered such prices to be high, but now no one remembers this. However, current prices in the EU do look seriously inflated compared to the price of gas in the US, which in March reached an absolute minimum since December 1998 – $1.25 per MBTU ($45 per 1 thousand cubic meters), and is now about $1. 8 per MBTU. In fact, gas in the USA now costs about the same for large consumers as for the Moscow region.

The reason for such incredible dynamics, which were not observed even during a pandemic, is not at all that gas production in the United States or in the world unexpectedly increased and a crisis of overproduction developed. On the contrary, production in the United States, the world’s largest gas producer, has hardly increased over the past two years, and in recent months it has been declining altogether due to too low prices, which do not pay for the drilling of new wells.

The reason is the unusually warm winter of 2023/24, which followed a very warm previous winter. Thus, on average this winter, the temperature over the land surface in the Northern Hemisphere was 2.65 ° C higher than the average over the past 20 years – this is an absolute record. In North America, the deviation from the norm was even higher (+3.43 ° C, according to the US National Center for Environmental Information). Since gas is primarily used for heating in winter, abnormally warm weather led to the fact that gas reserves in underground storage facilities in the United States amounted to a record 633 billion cubic meters at the beginning of April. ft., which is 23% more than a year ago and 39% more than the average over the past five years. Gas reserves in EU storage facilities are also record high.

The main reason for the extremely warm winter is apparently the influence of the El Niño effect, which this time, according to the World Meteorological Association, is among the five strongest in the history of observations. However, in March the phenomenon (which involves warming surface waters in certain areas of the Pacific Ocean, which has a global impact on the climate) appears to have ended and is expected to be replaced by the opposite phenomenon – La Niña – in the second half of the year. This means that a very hot summer (and the heat causes an increase in the consumption of electricity and, accordingly, gas for its generation) in the Northern Hemisphere may be followed by a very cold winter.

Such swings in demand could seriously affect the global gas market, which has just begun to recover from the price shock of 2022. The fact is that, contrary to usual practice, in 2022, high prices did not trigger a new investment cycle in the gas industry, and market balancing in Europe after the refusal of Russian supplies was achieved almost exclusively through a reduction in consumption, rather than an increase in supplies of new gas. Even those LNG shipments that first arrived in Europe in 2022 and 2023 were not “new” – they were diverted from other markets, mainly in Asia, since Asian consumers could pay the same for gas as Europe and therefore switched for coal.

Extremely mild winters and strict gas conservation measures have allowed European countries to accumulate large reserves in underground storage facilities and create a sense of security. It is also reinforced by the fact that so far, despite falling prices, gas consumption in European industry is recovering extremely slowly and may never return to its previous level. At the same time, European consumers have concluded almost no new long-term contracts to replace Russian gas in two years, and the EU’s medium-term energy strategy remains unclear. In these conditions, gas suppliers, lacking long-term demand from Europe, are extremely cautious about investing in new projects. Thus, LNG plants under construction in the USA and Qatar have contracted their volumes mainly to Asia.

So, it is quite possible that next winter will be the first real test of how ready Europe is to do without Russian gas. A new price surge, if it happens, could also have a disastrous effect on the long-term future of gas as a fuel: neither consumers nor producers like a product whose cost can change tenfold in a few years.

Yuri Barsukov, business editor