Natural gas is the third most important energy resource in the world – XTB’s report
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Introduction
Natural gas is the third most important energy resource in the world. For years, the gas market has been dependent on long-term supply contracts, which is why gas prices have been relatively stable. Everything has changed by increasing the supply of liquefied LNG gas. Russia is one of the largest players in the global gas market, using its resources as an economic and political weapon against European countries. The pandemic, the desire to further cut emissions and the war in Ukraine have made gas one of the key instruments on global financial markets. In this report, we will show what is responsible for the massive increase in gas prices in Europe and the US, and what the future of the natural gas market may look like.
Why is the topic of gas popular?
Gas is considered the least emitting fossil fuel in the world. What's more, unlike coal or nuclear power plants, gas-fired power plants can be turned on and off very quickly, which allows for great flexibility in building the energy mix in individual countries. That is why gas power plants became very popular in Europe and in the United States when coal power plants began to be abandoned. At the same time, gas is the most popular raw material for heating houses.
The topic of gas is currently very popular - mainly due to Russia's aggression against Ukraine and the ongoing war. Due to the fact that European countries were heavily dependent on Russian gas supplies, gas prices immediately "shot up" because supporting Ukraine in this conflict could end up "turning off the tap", which eventually happened anyway.
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However, the beginning of this situation took place much earlier. Germany's decision to build the Nord gas pipeline Stream has led to a significant drop in gas production across the European Union. Production has been reduced by up to half compared to the peak levels before the financial crisis of 2008-2009. This has led to an increase in the dependence of European Union countries on Russian gas supplies by almost 40%. Interestingly, when the EU countries reduced their production and increased gas imports from Russia, the shale revolution began in the United States, which clearly changed the energy mix in this country. Meanwhile, Germany, wanting to become even more dependent on Russian gas and be able to resell the raw material to other European countries, decided to build the second branch of the Nord system streaming . Even despite the annexation of Crimea by Russia in 2014, this project has not been suspended.
The hard winter during the pandemic led to low stock levels
The next stage of this story is the pandemic and the reduction of gas imports due to the decline in economic activity in Europe. What's more, the hard winter during the pandemic led to low stock levels. At the same time, Russia stopped selling gas on the spot market in Europe and limited the filling of its own warehouses in Germany, which was most likely a preparation for the possibility of blackmailing Europe at the time of aggression against Ukraine.
Russia finally invaded Ukraine in February 2022, and although it initially honored its long-term supply contracts, at one point demanded payment for gas in rubles. Moscow suspended deliveries to countries that did not agree to these conditions (including Poland, the Netherlands, Denmark and Bulgaria), and then, citing technical problems, reduced and finally suspended deliveries also to Germany. In the fourth quarter of 2022, Russia maintains only limited supplies via the Ukrainian gas pipeline and the Turkish gas pipeline.
At the end of September 2022, three gas pipelines were probably intentionally damaged
The last act of the story is sabotage related to the Nord system streaming . At the end of September 2022, three gas pipelines were probably intentionally damaged, which was supposed to further destabilize the situation in the region. As a result of sabotage, 3 lines of the Nord Stream can be turned off even for several years.
Heavy dependence on Russian gas and other raw materials such as oil and coal led to the fact that Europe faced the biggest energy crisis in history, associated with high prices and unavailability of raw materials.
The level of gas in storage facilities in the European Union at the beginning of this year was below the average for the last five years. The specter of the crisis encouraged EU leaders to fully fill their warehouses before the winter. In the chart above, we can see the forecast of warehouse filling, assuming a complete suspension of supplies from Russia and the absence of new sources of supply and consumption in line with the five-year average. As you can see, in such a scenario, there will be no shortage of gas in Europe throughout the heating period. Source: Bloomberg, XTB
