It was not long ago when analysts, politicians, and the media were rushing to show how gas was running out and Europe would be in despair this winter. But look how things turned out: Not quite like predicted.
Since the highs reached in August around 350 euro per megawatt hour -- when there were shrieks of the European Union, especially Germany, running out of gas -- today prices have more than halved, as Europe has about 90% capacity stored ahead of winter. There was such a scramble to lock in gas from alternative sources that Germany paid extremely high prices to secure supplies for this winter. Now, as weather is quite mild in October, prices for gas futures are falling as demand has dropped. But, of course, Russia's President Vladimir Putin has already managed to capture some high prices to fund his invasion.
Commodities are all about timing a window when demand exceeds supply, which causes a price squeeze. But over time, supply does catch up, or the system resets itself. The only problem is that sometimes it can be a few weeks and, other times, a few months. Gas is a commodity that is stored, but only by the season, so even if this winter may not be a concern, next winter could be different, depending on where Europe stands in terms of its alternative investments.
A secular case can be made for more diversification and cleaner sources, but relying on Russia is definitely not one of them. We saw a few weeks ago that even the NordStream pipe bursts did not cause much of a rally in gas. U.S. liquid natural gas cargoes have more than made up for the E.U. shortfall as U.S. producers have jumped on the opportunity to send gas trading multiples higher than at their local hub. Gas is fungible but via LNG is dependent on capacity and terminals. At the end of the day, the shortage was felt for a brief time, but then flows were rerouted to make up for the shortfall.
At the height of gas running out calls, there was a lot of pressure from oil bulls to push the case from gas to fuel switching. There is some merit to this and numbers for the fourth quarter have seen higher distillate demand that sees a higher fuel switching boosting demand. But the rationale works both ways. With gas prices now down at least 50%, surely that fuel oil switching no longer stands? Gas prices got so high that industrial and commercial demand was hit with factories shutting down, as it was not economical to produce fertilizers and other products that require natural gas. The tightness in oil, on the other hand, comes from tightness in the downstream products. Due to refining capacity being offline that has put added pressure on a system that was short of products to begin with post the Ukraine war. Refining is an industry that has not been invested in for years, given how horrid the margins had been. This, together with maintenance season and China's "zero Covid" policy has seen a lot of capacity out that would otherwise be churning oil to pump products.
On the other hand, OPEC+ producers want to keep the price of oil as high as possible as their future revenues depend on it. The topic has become quite contentious, as U.S. president Joe Biden is losing his sway over the region to help him curb these high prices ahead of midterms. After all, why should OPEC make up for the mistakes of U.S. energy policy that chose to focus on clean and green? There is a need for further investment, but we are far from fossil fuel independence. As with all things, it is a timing game. The important thing is to differentiate what is cyclical and what is secular.