Energy Market Overview: A record amount of LNG is being delivered to Europe in January
Although the current weather forecast for February is favourable for European electricity prices, gas reserves must continue to be used economically. The load of gas storage facilities is of decisive importance in terms of coping with the next winter.
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The average price of electricity last week in Estonia was 115.9 €/MWh (+35.2 €/MWh compared to the previous week). The cheapest hour was on the night of Monday, 16 January, with 32.38 €/MWh and the most expensive one on the morning of Friday, 20 January, at 9 o’clock with 229.42 €/MWh. Colder weather and slightly calmer wind conditions in the second half of the week affected prices throughout the region.
The average gas price for the week was 61 €/MWh, decreasing by 7 €/MWh compared to the previous week. A week ago on Monday, the price dropped to 56 €/MWh; the last time the price was at the same level was in September 2021. However, the price rose during the week due to forecasts for a cooler and drier weather. In addition, there was a price correction due to supply uncertainty this year. At the same time, it is noteworthy that TTF gas prices have been in a downward trend for seven weeks in a row, causing European LNG prices to fall with it. 45 LNG carriers arrived in Europe last week, and the next 43 should be on their way to Europe this week. At this rate, it can be assumed that a record amount of LNG will be delivered to Europe in January. The latest record was December when a total of 18 billion cubic meters of gas was brought by sea.
The latest weather forecasts for Europe see warmer weather with plenty of wind for early February. Possible frost is predicted again in the second half of February. Warmer weather means higher hydropower production for the Nordic countries, which will bring down electricity prices in February.
European gas storage levels are at 78%, being around 35% higher than a year earlier thanks to major demand reduction efforts. However, the levels are currently on a downward trend, declining three percentage points a week due to the colder weather.
Russia is still exporting gas to Europe via a pipeline running through Ukraine, with volumes falling by 23% on Thursday and Friday. Although Thursday’s exchange price of gas made a jolt upwards and brought a little anxiety to the market, it appeared on Friday that the decrease in supplies may be due to the reduced need of Europe to buy gas from Gazprom. The latter has not explained the decrease in volumes, but according to analysts, the exchange price has probably fallen below the level of Russian long-term contracts.
Before New Year’s Eve, almost 40 million cubic meters of gas flowed through the pipeline to Europe every day, while from 6 January it dropped to 30 million and on Thursday to less than 20 million cubic meters. Pipeline deliveries of the continent's largest gas producer, Norway, have steadily declined since 9 January’s record high, mainly due to maintenance work, falling from 343 million cubic meters to 323 million cubic meters at the end of last week.
The Freeport LNG export terminal in the US state of Texas, which has been offline since an explosion in June, will not start operations until March. Although the port does not directly affect European livelihoods, it makes competition on the global market more intense, as disruptions have also hit production in Nigeria and Australia, while Asian consumption is forecast to increase. According to a report by BloombergNEF, prices in Asia have not yet risen enough to entice LNG carriers to leave Europe. Although China's LNG demand has remained depressed for a long time due to corona restrictions, BloombergNEF forecasts that China will return to the position of the world's largest LNG importer this year, pushing Japan away.
Although various parties, from the French gas network operator to the German Chancellor, have assessed Europe's performance as “better than expected”, the market is very sensitive to changes. Thus, the market price of natural gas immediately turned upward after the news of a decrease in Russian flows, and the cooler weather that has reached Central Europe is predicted to last at least until the middle of next week.
Despite these circumstances, Europe is more and more likely to face the spring with significantly more gas than usual. According to a recent BloombergNEF report, European storage load will not fall below 50% by the end of winter, which should be enough to replenish stocks for next winter. Achieving the goal is important because the worst of the energy crisis may not be over. Looking ahead to next winter, Europe's LNG receiving capacity is not yet sufficient to completely replace Russian gas. Therefore, it is still necessary to keep Europe's gas consumption under control.
Qatar, one of the world's largest LNG exporters, predicts high volatility in the gas markets for several more years, because there will not be enough added production to cover the growing demand. Qatar is investing USD 45 billion to increase its production capacity by 60%, but the development will not start operating until 2027.
Reactors that were under repair at French nuclear plants have been put back into operation, and the French transmission system operator, which previously warned of power outages, announced last week that the risk of power outages has essentially disappeared. In the event of a possible shortage, the deficit would average up to 5% of consumption, for which the operator has enough reserves. Also, the threat of a gas shortage has essentially passed. Italy, too, has announced that their reserves are sufficient to cope with next winter.
Like Estonia, Germany is mapping the potential of its offshore wind farms. According to the results presented last Friday, more suitable locations for wind energy production have been found. According to the report, Germany could build up to 37 GW of wind farms by 2030 and up to 50 GW by 2035. Germany's national goal for 2045 is to have up to 70 GW of offshore wind capacity, to which 1 GW of green hydrogen electrolysis capacity is desired.
They are also more optimistic about the state of the European economy. Inflation in Great Britain fell for the second month in a row, and German Chancellor Olaf Scholz expressed his belief that economic recession could be avoided this year. The European Union sees a chance to avoid economic recession thanks to the drop in gas prices and the arrival of the European recovery funds in the economy.
The decision of OPEC+ to significantly reduce production, which caused a lot of discussion at the beginning of winter, has not led to a deficit or a particular price increase. According to a report by the International Energy Agency (IEA), production will exceed 1 million barrels per day in the first quarter of this year. The European Union sanctioned imports of coal from Russia already in the spring. An important share for its replacement has been found in the Republic of South Africa, with deliveries to Europe increasing sixfold last year.
The price of CO2 has increased from €80.2 per ton last week to €81.9 per ton. The main influence was the increase in the output of fossil fuel-based power plants due to the colder weather. The region's nuclear power output last week was 8.58 gigawatts. The 4th unit of Sweden's Ringhals nuclear power plant is still under maintenance (until 23 February). Maintenance work on the Olkiluoto 3 reactor will last until 5 February, after which some restrictions on production will apply until the beginning of March. Regular production with a capacity of 1,600 MW could start after that.
Eesti Energia’s plants in Narva were on the market last week with 460 MW. All steerable production facilities managed by Eesti Energia are available for the market this week at full or partial capacity.
The price of electricity is formed on the power exchange for each hour depending on the production capacity and consumer demand for that particular hour, as well as on transmission limitations between countries.
Olavi Miller, Market Analysis Strategist at Eesti Energia
The market overview has been prepared by Eesti Energia according to the best current knowledge. The information provided is based on public data. The market overview is presented as informative material and not as a promise, proposal or official forecast by Eesti Energia. Due to rapid changes in electricity market regulation, the market overview or the information contained therein is not final and may not correspond to future situations. Eesti Energia shall not be responsible for any costs or damages that may arise in connection with the use of the information provided.