Gas Demand Recovery in Europe Gathers Pace as Prices Plunge

(Bloomberg) -- European companies are using more natural gas as prices drop to levels seen before the Ukraine war, putting a potential strain on preparations for another winter with limited Russian supplies.

The green shoots are mainly evident in the refining industry, which can switch more easily between raw materials ranging from natural gas to fuel oil. Earlier this month, Dutch data showed the country’s petroleum sector had the biggest weekly gain in gas use this year, while French and Spanish gas network figures indicated refiners’ demand advanced in February from a year earlier.

The speed of the recovery will be crucial for the European Union and how it readies for a second winter with no pipeline gas from Russia. Rebounding demand could push prices past €100 ($109) per megawatt-hour this year, from about €43 now, and chip away at stockpiles, according Swedish bank SEB AB. It’s a view echoed by Vitol Group, one of the biggest gas traders.  

“Some manufacturing industries last year shifted from gas to fuel,” said Patrick Pouyanne, chief executive officer at TotalEnergies SE. “Now this year they are very reactive, they shift back from diesel or fuel to gas, so it’s creating an additional demand,” he said at a presentation in London on Tuesday.

European Refiners Eye Natural Gas Again After Price Drop: BNEF

Along with refineries, petrochemical plants will also be a good indicator of the recovery because they can easily switch back to gas to make power and heat, according to Energy Aspects Ltd.

“Other gas-intensive sectors will take longer to recover over the course of 2023 owing to their demand reductions being the result of reducing output rather than fuel switching,” the industry consultant said. 

As gas prices soared to records at the height of the energy crisis, Spanish industrial gas demand plunged as much as 40% in September from a year earlier. Overall usage by factories and plants slumped about 20% last year in Europe, accounting for almost half of the record drop in total consumption last year, according to the International Energy Agency. This year, the IEA expects demand in industry to recover by about 10%. 

From a peak above €340 per megawatt-hour in late August, benchmark Dutch gas futures have dropped about 90%. In February, usage by Spain’s refiners soared 8.1%, helping to pare an overall drop by industry to 9.5% from a year earlier, network operator Enagas SA said. 

In the Netherlands, gas use in the petroleum and the chemical industries have also started to exceed last year’s levels this month, CBS data show. 

“Lower energy costs — combined, possibly, with stronger demand from China’s reopening — mean that we expect industrial production to make some positive contributions to growth in the euro area this year,” said Maeva Cousin, a senior euro-area economist at Bloomberg Economics. 

While Goldman Sachs Group Inc. expects the industrial recovery will start to gather pace by the end of this month, other analysts warned it could still be a while. 

“It will take time for gas tariffs from gas suppliers to fall enough and over a sustainable period for factory managers to take the decision to resume output,” Energy Aspects said. 

Factories Moving 

Despite the plunge in prices, they are still way above the historical average and are expected to remain elevated until about 2025 when new global supply is poised to arrive. 

That means some demand may be lost forever as factories relocated to parts of the world where energy costs are lower. 

Chemical firms BASF SE, Dow Inc. and Lanxess AG are poised to cut thousands of jobs and shift investment out of Germany because they don’t expect Berlin to reliably provide the energy they need at prices close to those they once paid for Russian pipeline gas.

A survey from Germany’s VCI chemical association earlier this year revealed that almost half of companies plan to cut investment in the country this year due to high energy costs. Production is likely to shift to countries with similar values and political systems, said Oliver Wojahn, an analyst at Alsterresearch AG. 

“The outlook for the future has brightened somewhat in Germany’s third-largest industry,” VCI said in a report this month. “The major drop in energy and raw material prices in recent months has stabilized the situation where the bottom seems to have been reached. Unlike the pandemic or the global economic crisis, this time there will be no powerful recovery.”

(Updates with current gas price in third paragraph.)

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