November 8, 2023

  • Near-term risks to Europe’s energy security are rising, with natural gas prices (European Title Transfer Facility) increasing by 30% since the outbreak of the Israel-Hamas war. Israel has restricted gas flows from its Tamar and Leviathan gasfields to Egypt, which had been looking to ramp up its exports of liquefied natural gas (LNG) as European seasonal gas demand increases. However, Egypt has become increasingly reliant on Israeli gas not just for LNG feedstocks but also its own domestic energy needs. EIU expects the disruption to Egypt’s LNG exports to have only a negligible impact on global LNG supplies, but this will be enough to add to market jitters.
  • The war adds to growing concerns about tight energy markets and the potential for more serious disruptions to European gas supplies. Although the EU does not import LNG from Australia, strikes by Australian LNG workers caused gas prices to spike in September. Recent damage to the Baltic pipe likewise added to price pressures in early October.
  • EIU expects European gas prices to average around US$15/mmBtu during the 2023/24 European winter. We still expect a 10% year-on-year fall in the average price in 2024, with further falls in 2025 and 2026. Contract LNG prices, which broadly match crude oil price trends, are expected to climb from US$12.7/mmBtu in the third quarter of 2023 to US$16.4/mmBtu in the first quarter of 2024, before easing back to about US$13/mmBtu by year-end.
  • European gas storage levels, at 98.7% on October 24th, are at record highs, and the EU met its November 1st target of 90% more than two months in advance. Gas consumption in September was down by 7% year on year, as EU voluntary measures—now extended until March 2024—have been effective in cutting demand. Member states are also considering extending the €180/MWh energy price cap into 2024.
  • Europe’s energy outlook is increasingly precarious, but the bloc is sufficiently prepared for the coming winter. However, Russia (which still accounts for about 15% of total gas imports) could cut flows as part of its energy war with the EU. Add an unseasonably cold winter, and Europe could find itself facing another energy crunch as in 2022 (not our baseline forecast). Of more concern to markets is the situation in the Middle East, where escalation of the Israel-Hamas war into a regional conflict could threaten LNG supplies from Qatar or disrupt traffic through the Suez Canal, not to mention sending oil prices soaring. If these risks materialise, Europe would be able to rely on its extensive gas stocks, but would face rocketing gas and LNG prices, sparking a resurgence of inflation.

Source: Economist Intelligence Unit (EIU)
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