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May 24, 2024

Will the market recover?

One of the key features of the gas market recently is the dramatic and unprecedented decline in gas demand, both in this country and in the rest of Europe. In 2021 UK gas demand was 854000 GWh, it dropped to 787,000 GWh in 2022 and fell further to 704,000 GWh in 2023, a 2 year decline of 18%. This was replicated across Europe, with gas demand in OECD Europe falling by 20% between 2021 and 2023.

The cause of the fall in demand is probably due mainly to two factors; loss of market share to renewables and cut backs by customers in response to the unprecedentedly high prices. Given the massive surge in prices in the last two years the latter is more likely to be the key driver.

However, in 2024 UK and world gas prices have dropped dramatically, back close to “normal” levels. In the period 2020 to 2021 day ahead prices in the UK were around 70p/therm on average, although this average concealed substantial variations in prices. UK prices surged up to 209p/therm for 2022 before declining to 101p in 2023. In the first 4 months of 2024 price fell still further, down to 70p/therm on average. After the energy crisis, following the Russian invasion of Ukraine in 2022 the UK and the rest of Europe became much more dependent on LNG and a similar price trend was observed here. JKM spot LNG prices for the Far East were $12/mmbtu in 2020 and 2021, surged up to $33 in 2022 and then fell back to $14 in 2023 and down to an average of $10/mmbtu in early 2024.

This raises the interesting question of what will happen to gas and LNG demand now that prices have returned to “normal” Levels . It seems likely, given the massive price drop in the last 6 months, that gas demand in Europe for 2024 is likely to be above the levels last year. Given the dependence on LNG in Europe it may be significant that LNG demand in China is expected to rise by 13% this year. Could this mean a mini revival in European gas prices in the Winter of 2024/25? Last winter was one of the warmest in history and even an average winter might mean higher prices.

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