In the fog of war

Besides the human tragedy it is causing, the invasion of Ukraine by Russia on 24 February has triggered a major energy crisis. This has wider repercussions for the global economy that will negatively affect economic growth and support rising inflation through higher commodity prices.

The conflict has added further pressure and uncertainty to an already tight natural gas market. Europe’s natural gas supply has been a topic of concern since mid-2021 as storage inventory levels have remained well below average – especially in sites directly or indirectly controlled by Gazprom. The continent’s storage opened the heating season 17% below its five-year average, and 22% below the previous year’s level. The close to 25% year-on-year (y-o-y) drop in Russian pipeline flows during the 2021/22 heating season further exacerbated market uncertainty.

European short-term prices have reached all-time record highs since the beginning of the conflict as Europe became the premium market this past winter and attracted massive LNG flows to compensate for the sharp decline in Russian pipeline deliveries. LNG diversions to Europe were key to balancing winter consumption. The competition for flexible LNG cargoes pushed Asian spot prices to a record high and led to further curtailment in price-sensitive importing markets, particularly in emerging Asia. Price volatility also reached record levels as a result of unprecedented uncertainty.

Russia is Europe’s largest natural gas supplier, meeting 33% of the region’s demand in 2021 after constant growth over the past decade due to the depletion of domestic production. Ukraine has remained critical to the transit of Russian natural gas to Europe despite the development of alternative transit routes, accounting for almost 7% of Russia’s pipeline deliveries to Europe in 2021. Natural gas transit flows through Ukraine have so far remained unaffected by the conflict, despite Ukraine itself experiencing supply disruptions caused by the Russian invasion.

At the time of writing, there are no legally binding import restrictions on Russian natural gas in the European Union, yet there is a strong drive to reduce the bloc’s exposure to Russian energy imports, as established in the European Commission’s REPowerEU outline plan issued on 8 March. This echoes the IEA’s publication of a 10-Point Plan on 3 March, outlining a suite of measures to reduce the volume of Russian gas imports into Europe by over a third within a year. The observed drop in Russian pipeline deliveries to Europe (and absence of spot traded volumes since the beginning of the heating season), combined with the European Union’s objective of reducing its supply dependency on Russia, has led to a downward revision of Russian pipeline deliveries to Europe for 2022 in this forecast. This in turn necessitates higher LNG imports in order to balance consumption needs and ensure the filling of European underground storage sites, with a minimum 80% filling target by 1 November (and 90% from 2023) as part of a European Commission legislative proposal issued in late March.

Higher LNG import needs in Europe are putting pressure on an already tight global LNG market balance in 2022. The prospect of additional supply appears limited as incremental export capacity relies on a limited number of projects, while several exporters are still hampered by 2021’s extended capacity outages. The resulting supply tensions and high short-term prices are likely to have a negative impact on natural gas consumption in price-sensitive emerging markets, which will also be affected by the rising cost of their oil-indexed long-term LNG supply contracts.

Natural gas demand is also likely to be affected by the conflict’s wider repercussions on the global economy – including rising commodity prices (food, energy, industrial raw materials) pushing up inflation further and reducing the value of incomes, lower investment due to greater uncertainty and downgraded business confidence, and difficulties accessing financing. The current gas supply tensions and high prices also have strong negative impact on the non-energy uses of natural gas, especially for fertilisers. Natural gas accounts for 70% of global ammonia production, which is the starting point for all mineral nitrogen fertilisers. The price of urea more than doubled in between September 2021 and March 2022. China and Russia, two major exporters of urea, have restricted exports in late 2021 in order to maintain supply and food security for their domestic markets, and sanctions on Russia have put further tension on fertiliser availability and future crop yields.

Gas demand growth turns negative for 2022

This report revises global natural gas consumption growth for 2022 from a previous 1% to slightly below zero, which is equivalent to a negative demand revision of 50 bcm compared to the previous quarterly report’s forecast.

Almost all regions have been revised downwards, with a large share of the impact in the Asia Pacific region, on a combination of a downgraded economic outlook from high commodity prices and the risk of physical limitations on access to LNG – especially for price-sensitive buyers with a higher exposure to short-term LNG procurement.

Natural gas consumption in Europe and Eurasia, which was already expected to decline in 2022 after strong contributions from weather‑related demand in 2021, has been further revised downwards. Consumption in these regions during 2022 is anticipated to fall by close to 6% and 5% y-o-y, respectively. Other regions are so far expected to be less directly affected by international gas trade tensions as they principally rely on domestic production. They would nonetheless be affected by the indirect macroeconomic consequences of the conflict on their domestic economies and gas markets.

The outlook remains highly uncertain, and further downsides can be expected, especially in emerging gas importing markets, as a result of lasting supply tensions, high prices and volatility. 

The Russian invasion of Ukraine created unprecedented uncertainty and volatility for both European and Asian gas markets

Daily European month-ahead and Asian spot LNG prices, January - April 2022


Revised consumption growth is around 50 bcm lower, resulting in negative gas growth for 2022

Natural gas consumption growth in Gas Market Report, Q2 2022 compared with Gas Market Report, Q1 2022


Europe’s incremental supply needs drive LNG market growth and tightness in 2022

Global LNG balance, year-on-year change, 2021-2022