Europe’s natural gas demand is expected to weaken ahead of winter as prices surge on tight inventories. European benchmark futures for delivery in January 2022 have climbed to a record €66 ($78) per MWh from just €16 a year earlier. Prices began to rally in April as decreasing inventories signalled an impending supply shortfall.
Amid declining Russian pipeline gas supply, European buyers are bidding up prices, trying to outcompete Asian rivals in grabbing available LNG cargoes. However, LNG flows to Europe have been stagnant, and storage facilities have filled more slowly than usual. At the same time, wind-farm power output fell in recent weeks due to unusually weak wind, forcing gas-fired units to run for more hours.
Gas accounts for 19-20% of Europe’s electricity generation. The supply shortfall has raised a concern of a wider energy crunch. High gas prices are also likely to prompt power producers to switch back to coal. Meanwhile, steel, cement, petrochemical, ceramics, glassware, and fertiliser producers are expected to consider reducing output or halting production temporarily.
