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Winter Outlook 2024 - Envantage Ltd Skip to main content

Winter Outlook 2024

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Commodity Prices Outlook: Navigating Risks and Opportunities

Wholesale gas and electricity prices continued their decline into early 2024, bottoming out in February. However, rising Asian gas prices and geopolitical tensions in the Middle East and Eastern Europe brought renewed volatility in Summer 2024, reversing earlier losses. The Summer 2025 contract surged by 13% over the past six months, driven by concerns over tight supply ahead of winter storage injections and potential disruptions due to Russia-Ukraine tensions.

Despite a slow start to storage injections, European gas inventories are nearly 95% full. Full capacity at Norwegian facilities is expected by late October, along with improved French nuclear and hydroelectric power output. This positions Europe favorably for the winter, although risks remain for price spikes due to unplanned outages or colder-than-expected weather.

Geopolitical Uncertainty and Supply Risks

The end of Russia’s gas transit agreement with Ukraine at the close of 2024 adds to supply concerns. With U.S. LNG projects delayed until 2026, 2025 contracts trade at a premium, reflecting anticipated market tightness. Additionally, ongoing conflicts in the Middle East have disrupted LNG deliveries, with ships being rerouted due to Houthi rebel attacks on commercial vessels.

Following the invasion of Ukraine, Europe replaced most Russian gas with liquefied natural gas (LNG) imports, increasing its exposure to global supply risks. As European LNG contracts are primarily flexible, competition with Asia during peak demand remains a significant threat. For instance, Asian markets like China and India have driven up prices through high industrial demand, while emerging markets such as Egypt have shifted from exporters to net importers.

High Storage Levels May Not Prevent Winter Price Spikes

Europe is set to start winter with record gas storage levels, expected to exert downward pressure on prices. Storage capacity reached 95% well ahead of the November 1st deadline, providing a crucial buffer to cover up to one-third of the EU’s winter gas demand. However, any unplanned supply outage or extreme weather event could quickly destabilize markets, pushing prices upward.

Energy demand across Europe remains below pre-crisis levels. Despite anticipated year-on-year growth over the next six months, demand will likely stay lower than before the 2022 price surge. Renewables, particularly wind and hydroelectric power, continue to reduce reliance on gas, while industrial gas consumption has struggled to recover, with some sectors still lagging.

Renewables and Nuclear Generation Set to Influence Prices

The expansion of renewable energy infrastructure in Europe has accelerated, applying downward pressure on electricity prices. However, the intermittent nature of renewable sources like wind can create volatility. The National Grid anticipates a winter margin of 5.2 GW (8.8%), indicating adequate supply, though occasional tight days are expected. Strong nuclear output, especially in France, will help balance the grid.

Weather related risks

Weather remains a significant driver of energy prices, with the potential for La Niña conditions to influence winter demand. La Niña typically brings cold and wet weather to Europe, potentially boosting heating requirements and supporting energy prices. The North Atlantic Oscillation (NAO) index, which measures winter weather patterns, will also play a crucial role in determining market dynamics.

Key Risks for Winter 2024/25

  1. Geopolitical tensions – the escalation of the situation in Eastern Europe or the Middle East could create significant upside risk due to the impact on LNG flows and oil prices.
  2. Weather / demand-side risks – various reports suggest the possibility of La Niña event this winter, which could have considerable impact on residential demand.
  3. Competition with Asian markets – the availability of LNG imports will depend on Asian demand. JKM has been trading at premium compared to TTF and NBP, major European benchmarks and should this trend continue, we might see suppliers favour Asian markets over Europe.
  4. Unplanned outages – considering tight supply situation, any unplanned outage, especially during peak demand period, could bring significant volatility to energy prices.

Conclusion

Europe is entering winter with well-stocked gas reserves, strong renewable output, and robust nuclear generation. While current conditions appear favorable, structural market tightness and geopolitical uncertainties could rapidly shift the landscape. Careful monitoring of weather trends and geopolitical developments will be essential for navigating the season’s risks.

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