International Energy Agency executive director Fatih Birol has warned that supplies could tighten further next year.

International Energy Agency executive director Fatih Birol has warned that supplies could tighten further next year.Credit:AP

The IEA’s executive director,Fatih Birol,speaking at the Singapore International Energy Week on Tuesday,said that natural gas and LNG markets would tighten further next year,with only modest (20 million tonnes) of new liquefaction capacity scheduled to come online. With supply remaining tight,demand for gas would continue to be strong,especially in Europe and perhaps in China,he said.

The energy crisiswas sparked by Russia’s invasion of Ukraine and its throttling of gas supplies into Europe,along with some voluntary reductions in demand by Europe in response to the invasion. The invasion ignited a scramble by European utilities to find alternate sources of supply,forcing European gas prices and global LNG prices up dramatically.

Aided by the fact that there were strong volumes of Russian gas available in the first half of this year,along with the efforts to reduce demand that have included some rationing of gas to European industries,Europe is now awash with gas.

Gas storage facilities in Europe are on average 93.6 per cent full. In Germany they are at 97.5 per cent of capacity. On average,storage levels are about 14 percentage points higher than they were at the same time last year.

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So much LNG has been contracted that there are about 60 LNG tankers off the European coastlines,unable to unload because of a lack of sufficient regasification capacity. The Europeans are now rushing to build new import terminals and securing floating regasification terminals to try to overcome the major obstacle to their ambition of replacing Russian gas with imports.

European gas prices soared following the invasion as the Europeans entered what was already a tight market for LNG. In August Dutch gas futures,the benchmark for European gas prices,were above €300 ($468) per megawatt hour. Historically,they have traded between about €20 and €40 per MWh.

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The glut of gas in Europe,aided by the impact of mild weather on demand,has caused prices to plummet about 70 per cent to around €93 per MWh. That’s still,of course,a multiple of the prices experienced pre-invasion and is likely to be only a temporary lull,with the prices for LNG scheduled for delivery in the first quarter of next year above €140 per MWh.

In any event,at considerable cost,the Europeans appear to have secured enough supplies of gas and done enough on the demand side (the members of the European Union have agreed to cut consumption by 15 per cent) to get through anything other than a severe winter.

The addition of previously modest European demand to the international gas market as the European Union has sought to replace the 40 per cent of their gas previously supplied by Russia has,however,had what will be a structural impact on the market. Whatever the outcome of the war in Ukraine,the Europeanswon’t allow themselves to again become dependent on Russian gas.

Europe’s gas levels are nearly at full capacity after it scrambled to import liquefied natural gas from around the world but next year threatens to be a much different proposition.

Europe’s gas levels are nearly at full capacity after it scrambled to import liquefied natural gas from around the world but next year threatens to be a much different proposition.Credit:AP

With Europe and the US,and others,also placing embargoes on Russian oil – tough sanctions on those insuring,shipping or financing Russian oil cargoes,including price caps,are scheduled to be imposed early next month – the invasion is also having an impact on the global market for oil,one compounded by OPEC+’s controversial decision to cut its output by two million barrels a day. (In practice,because many OPEC members were producing less than their committed levels,it will be closer to one million barrels a day).

The aftershocks of Russia’s invasion have travelled through world markets and impacted the global economy and will probably be a major contributorto a global recession.

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They have been a factor in therampant inflation rates throughout much of the world,most acutely in Europe,and consequently in the rapidly rising interest rates and rapidly declining real household incomes as central banks try to subdue that inflation;a decline in incomes exacerbated by the huge spikes in energy costs.

If the IEA is right – and the logic is sound – we haven’t seen anything yet. Next year should be worse.

That’s because there will be little,if any,Russian gas flowing into Europe. Russian oil sales will also probably be reduced by the tougher sanctions. Europe will start next year with lower gas and oil stocks but reduced sources of supply from which to replenish them for the 2023 winter.

Europe will have no option but to try to buy more LNG within a market where there is little new supply available in then near term and where China’s demand – currently soft because of an economy that has slowed significantly because of the rolling lockdowns flowing from its zero-COVID approach to the pandemic – might rebound. The impacts on prices could be severe.

The US shale producers who are the swing producers that would usually be expected to quickly increase production when prices surge are producing about a million barrels a day less than they were before the pandemic. Supply chain issues,constraints on pipeline and other infrastructure and an increased focus – imposed on them by investors – on returns on their existing capital has limited new investment and production.

That’s true to a wider extent across the oil and gas sector. The pandemic added to the longer-term pressure on the fossil fuel industries’ investment in new production flowing from the intensifying global efforts to reduce carbon emissions.

Given the lead times for developing new oil and gas fields and the infrastructure associated with them,there isn’t going to be production-driven relief for what could be even tighter energy markets next year,although the core OPEC members could unwind their production cuts if they wished.

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A global recession and the price shocks would,of course,have an impact on demand and might moderate the extent of the price shocks and shortfalls in supply. That’s not,however,a particularly palatable way to resolve the energy crisis.

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