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11 January 2023

Gas prices plummet to pre-war levels – Rethink predicted this in 2022

Exactly one year ago the world started holding its breath as rumours about Russia setting up an invasion on neighbouring state Ukraine started to look more and more like a certainty. Given the economic relationship between the ex-Soviet power and the rest of Europe, people within the energy industry, alongside economists, posed important questions regarding the continent’s energy needs and how this game of chess would impact our lives.

As sanctions started to roll from the West, less and less natural gas has been purchased from Russia and efforts needed to be made in order for these countries that depended the most on the Russian resource, to plug the gap in their energy mix and find alternatives.

Rethink decided to take out its latest natural gas predictions and make educated guesses on how this newly formed European dynamic would affect gas usage beyond 2022 and we pushed an opinion on when the price would come down – an opinion which can be accessed through the paper titled “Natural gas market adjustments show price to fall after 2024. ”

Our initial predictions pointed at early 2024 (post 2023-24 winter) as the point of sudden decline in natural gas usage – almost two years after the invasion began – hence the point where the price would start to decline considerably. One critical condition upon which the fluctuation in price depended was how rough the 2022-23 winter was going to be, a detail which we pointed to in our report.

The current unseasonably warm weather means only one thing. Gas demand has fallen and so has the price. In the UK auction, the wholesale gas prices dipped as low as £1.62 a therm, where 1 therm = 100,000 BTU (British Thermal Units) – which ranks below pre-war levels for the first time. Since the start of the war prices peaked at £6.40 per therm around August. Estimates also indicate that the UK Government can save in excess of £10 billion in funds which were planned to alleviate the impact of the energy crisis on households and energy bills.

As of December 23rd, European gas spot price TTF also fell for a fifth consecutive week in a row to $2.5 per therm. The US spot price for Henry Hub fell for the second consecutive day to $5.3 per therm on December 20th while the Northwest Asian spot price JKM fell to $3 per therm around the same period.

All this happened not only as a result of a warmer than usual winter, but also due to national strategies that replaced the demand for gas rather than relying on its reduction through external factors. For example, countries like France, Germany and Japan have either continued to show increased support towards nuclear or pulled a 180 degree U-turn on their policies and plans to phase out nuclear plants. Germany was supposed to phase out nuclear by the beginning of 2023 but decided against it, while Japan changed its policies on nuclear power for the first time since the 2011 Fukushima incident.

Consumption of coal has also been on the rise in less developed countries who found it easy to switch from one fossil fuel to another in the absence of any renewable infrastructure.

These are all short-term fixes which negate the undertone of the bigger energy problem, which is eliminating fossil fuels throughout. The fact that the amount of recent investment into renewables like wind, solar and even the hydrogen industry, which will help decarbonize hard to abate sectors, only came as a result of an imminent energy crisis, begs the question: is enough being done at the moment, or does there still exist a lack of political will to pursue energy security in Europe?