Gas prices suddenly increased by 20% at the beginning of the week. It may not stop at that one price increase.
Europe is just getting used to the steady decline in gas prices. The look was bright. Gas storage facilities were already full and demand for gas remained limited. Ideal conditions for a low gas price. At the end of May, the European gas price fell below the €24 per MWh limit for the first time in two years. This puts us apart from the more than 300 euros per MWh recorded last summer.
The question is whether it will stay that way. On Monday, the price jumped to 29.36 euros per megawatt-hour. Meanwhile, it has decreased somewhat, but the price of gas is still higher than it was before Monday.
There are several reasons for the sudden price increase. For example, a large Norwegian gas field is closed for maintenance. This means that less Norwegian gas is going to Europe. “But such maintenance is pre-planned, so it can’t come as a surprise,” says Cyril Federshoven, an independent energy expert.
Demand continues to rise. China thinks the time is right to buy more
However, Widdershoven points to increased demand from Asia as the main reason for the price increase. Demand continues to rise. China believes this is the right time to buy more.” Countries such as Japan and Korea are also entering the gas market.
This mainly relates to LNG and LNG. “This is a global market. If one party pays an extra dollar per megawatt-hour, it will already be profitable to transport gas there,” says Wedershoven.
This turned out to be the case, because US LNG ships have been heading to Asia with their cargo in recent days. There are two reasons for the increase in demand from the Far East. First of all, it is already unusually warm. This means that a lot of electricity is used for air conditioning. Electricity is partially generated at gas-fired power plants.
In addition, growth is picking up, which means that more gas will be consumed anyway. So the demand is structurally increasing and this is a problem for Europe. We have a few long-term LNG contracts. This means that we have to buy gas from the spot market. Prices in the spot market also respond instantly to supply and demand,” Wedershoven explains. As demand goes up, so does the price. A problem you don’t have with long-term contracts, which have fixed-price agreements.
The scarcity is not over yet
“I don’t see why Europe stopped approving long-term contracts when the price went down,” says Widdershoven. Because the scarcity in the gas market has not ended yet, according to the energy expert. “It will certainly take until 2026 before there is enough capacity to meet LNG demand.”
Europe’s reluctance to conclude contracts for ten or twenty years is understandable. The intent is to get off the gas as quickly as possible, climate-wise. But for now, Europe is still largely dependent on gas for its energy.
Until 2026, Europe will therefore have to compete with Asia for scarce LNG. Europe is at a disadvantage because Asian countries have already bought a large portion of their gas needs through long-term contracts.
Multi-year power contract
Widdershoven expects gas prices to rise structurally, up to €75 per MWh. It is possible that countries like Pakistan and Bangladesh do not have the money at all to buy LNG from Qatar. Then there will be additional LNG on the market, which may lower the price somewhat.” In the appropriate scenario with a mild winter, the price may be lower.
It is difficult for consumers to choose whether or not to enter into a multi-year energy contract. If the winters are mild again and Qatar can supply additional LNG, there is a good chance the price will drop again. But with a harsh winter and soaring prices, it was wise to set the price up front. Thus, it is a matter of choosing long-term certainty or hoping for a favorable scenario with prices falling again.
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