IEA (2022), Gas Market Report, Q1-2022, IEA, Paris https://www.iea.org/reports/gas-market-report-q1-2022, License: CC BY 4.0
The season is still upon us
The year 2021 opened with cold spells that triggered price spikes in Asia in January and North America in February. These were followed by strong economic recoveries and other weather events, resulting in volume growth estimated at 4.6% year-on-year (y-o-y). The year ended with all-time high natural gas prices in the main importing markets in Europe and in Asia. The combination of demand growth and lower-than-expected supply led to the extremely tight gas market situation that prevailed throughout the final months of 2021. This was especially the case in Europe, where limited Russian pipeline supply flexibility and below average underground storage inventory levels prompted additional anxiety from the start of the heating season.
Natural gas prices have followed temperature variations over recent weeks, as the heating needs of residential and commercial customers in the main northern hemisphere markets drives gas demand. Meanwhile, the impact of weather conditions is being exacerbated by the extremely tight market situation in Europe, leading to extreme levels of price volatility. Mild temperatures, together with higher LNG inflow, moderated European prices at the start of 2022, but every new sign of colder weather or tighter supply quickly prompts price increases.
Uncertainty over prices and supply remained high as of early January, with most of the heating season still to come. Weather patterns are likely to remain the principal driver of both prices and volatility in the coming weeks, although there are also other physical, commercial and geopolitical factors at play.
Exceptionally high gas – and by extension electricity – prices have hurt consumers, utilities and wholesalers, and are likely to have a lasting negative impact beyond the current seasonal tension. The effects are not limited to Europe, as markets throughout the world experience the painful consequences of high gas prices. Emerging economies are particularly vulnerable, and are already experiencing power cuts, industrial demand destruction and potential food supply issues in the absence of affordable gas-based fertilisers.
The current market situation is a stark reminder for gas-consuming countries of the importance of implementing and updating their security of supply toolboxes, including policies to protect consumers and to optimise the use of gas infrastructure, especially storage.