Weather is the key factor that will define whether gas demand will be met, not only in Europe but also in Asia and Russia this winter, according to Massimo Di-Odoardo, vice president, gas and LNG research, at Wood Mackenzie.
According to Wood Mackenzie expert's latest paper about natural gas, many other factors will influence how the European market will balance this winter, including how much LNG, pipe imports and domestic storage will be available to Europe, how demand responds to these record prices and how much capacity and actual supply will be available from Russia.
Di-Odoardo said that under normal winter weather conditions across the northern hemisphere, Europe would not have issues in meeting demand.
However, a cold European winter combined with a cold Asian winter would mean insufficient gas availability to meet demand, unless more pipeline capacity from Russia is made available.
A cold European winter could boost heating demand up to 20 billion cubic meters (bcm), while a cold Asian winter could add up to 7.5 million tonnes, or 10.5 bcm, of LNG demand across China, Japan, South Korea and Taiwan, which would take 10.5 bcm in LNG imports away from the European market.
A cold winter in both Europe and Asia would risk European storage levels dropping to zero, leaving Europe dependent on the timely approval of Nord Stream 2 or Russia’s willingness to ship more gas through Ukraine if it is to avoid demand curtailments.
'A cold winter in Russia would limit Gazprom’s ability to support additional exports through both Nord Stream 2 and Ukraine - although that has never been likely. The sky could be the limit for European gas prices this winter,' he noted.
High gas prices, he said, are putting pressure on demand, encouraging the use of coal in power, and curtailing some energy-intensive industrial demand.
Combined with cold weather conditions, both low storage and LNG imports would test demand limitations, as storage will only achieve 78% of capacity or 87 bcm by the end of October, marking a record low. LNG imports will also be limited this winter, as Asian demand remains strong.
'With only 29 bcm of gas in storage, there is a risk storage levels could drop to zero. If this plays out, Europe would be wholly dependent on Russian flows above existing capacity. If it is approved by the end of the year, Nord Stream 2 could provide some respite to the European market, delivering up to 12.5 bcm through the winter. But that remains uncertain and may materialize too late for the market to stabilize under cold weather dynamics,' Di-Odoardo said.
He also suggested that a rebound in Norwegian and the UK's production, together with stronger exports from Algeria and Azerbaijan, would increase winter pipe supply compared to the summer.
'Assuming Russia will use all of its existing capacity, including via Nord Stream, Yamal-Europe, TurkStream and Ukraine up to the ship-or-pay agreement, we anticipate Europe will need around 58 bcm of storage to meet demand. This would leave around 29 bcm of gas in storage by the end of March, below the average level of the past five years, but comfortably above record lows. We expect gas prices to ease under normal weather conditions,' he said.
By Murat Temizer