After a turbulent 2021, it appears that there is little respite for energy markets so far in 2022. Energy prices continue to dominate news stories across Europe prompting discussions from households to within the highest offices of government.
What are the challenges?
Europe is facing a natural gas shortage which has been ongoing since late December 2020, meaning that prices are high for supplying both gas and electricity (due to gas being the largest component in electricity generation in the UK).
The geopolitical situation between Russia and Ukraine has escalated this issue so far in 2022, with risk priced in as Russia supplies around a third of Europe’s gas consumption via existing pipelines and this could increase should Nord Stream 2 gain certification.
As a result, the UK market has been increasingly reliant on LNG (liquefied natural gas), imports from European storage and flows from Norway.
What will affect prices in 2022?
The tensions between Russia-Ukraine and Ukraine’s western allies are the key price factors at the moment. Diplomatic talks have been ongoing since the New Year and hopes are for a peaceful resolution which would ease the risk built into market prices at present. There are several potential scenarios, below is the worst case should any conflict arise.
- Vladimir Putin has ordered troops into two rebel-held regions in eastern Ukraine which could either result in no exports from Russia or sanctions imposed by Western countries for gas imported from Russia. For European customers who are struggling with gas and electricity prices which have quadrupled in the last year, further shortages would be economically devastating.
- Should this happen, with help from the USA, Europe is set to increase its share of LNG and other sources from major energy producing nations if Russia invades Ukraine.
As Russian supply has been limited since Christmas, European gas storage is at a near record low. This will require re-filling during the summer months to ensure supply is available during the colder winter periods. At present it appears to be a big challenge given the supply squeeze, although in contrast to 2021, Europe is attracting more LNG than Asia which could provide an opportunity to inject gas into storage.
There are many more factors that will direct prices in 2022, these are just two of the key drivers. The Risk Management Team at Consultus sends regular Energy Insights to customers. Should you have any questions or want to find out more, please get in touch email@example.com
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