The price of natural gas in Europe has hit its lowest point in two years, signaling a lack of demand in the market. This is a welcome relief for the continent, which experienced historically high electricity and gas prices last year. In fact, the wholesale gas price on the Dutch exchange plummeted to its lowest level in the past two years this week, and experts suggest that further declines may be on the horizon. The question arises: What are the main factors contributing to the current affordability of natural gas?
One significant factor is the growing import of liquefied natural gas (LNG) overseas as an alternative to Russian pipeline gas. Although LNG cannot entirely replace the shortfall caused by reduced Russian supplies, the volume of deliveries is gradually increasing, thanks in part to the opening of new terminals.
Additionally, favorable weather conditions during the winter and public appeals for energy conservation led to a decrease in overall gas consumption. As a result, the gas storage facilities of the European Union are currently filled to around 67%, significantly surpassing the five-year average of approximately 50%.
Germany, for instance, boasts a gas storage capacity of 73%, according to Gas Infrastructure Europe, while the Czech Republic stands at 65%. Another contributing factor to the low gas prices is the weakened state of the economy. In particular, Germany, the largest economy in the EU, entered a recession in the first quarter of this year. The economic slowdown has resulted in a significant decline in production, which has led to reduced energy consumption.
Furthermore, the recent rebound of the Chinese economy has slowed down. If LNG demand from China weakens, it is possible that gas prices could drop below 20 euros/MWh, as stated by analysts from Energy Aspects.
The expansion of renewable energy sources is another critical factor. Europe has been increasingly focused on developing renewable energy, with new solar and wind farms established. The favorable weather conditions have also contributed to a reduction in the need for gas in electricity generation.
However, despite the low gas prices, there has not been a corresponding increase in industrial demand in Europe, which was adversely affected by high energy prices in the previous year. It remains uncertain when or if demand will return to previous levels, and some experts suggest that a portion of the demand decline may be permanent. Industries, particularly those heavily reliant on gas consumption, may have either relocated or collapsed due to the high energy prices, and they may not return even if prices decrease.