Europe is in the throes of an unprecedented energy crisis, with demand outstripping supply as economies rebound from the pandemic. This is exacerbated by the Russia-Ukraine conflict, which is stymying flows of Russian natural gas — a key source of energy for the region.

In 2021, the EU imported around 155 billion cubic meters of natural gas from Russia, amounting to around 40% of its total gas consumption. However, this has slowed to a trickle after Gazprom announced the indefinite closure of Nord Stream 1 (NS1) — the largest gas pipeline to Europe — in September 2022. Russia cited maintenance work, but EU leaders say the damage causing leaks was caused deliberately.

As a result of the energy shortage, natural gas prices have skyrocketed, squeezing household budgets and driving up the cost of living. The natural gas shortage is also hitting oil and coal markets. Industrial consumers such as refineries and power plants are switching to alternate sources of fuel, sending spot prices higher and further compounding the crisis, which is expected to persist beyond winter 2022.

Visible pipeline flows from Russia to Europe

Looking ahead, the energy shortage is expected to persist throughout 2023. “Even if the Northwest European natural gas market exits the winter withdrawal season with 35% in storage, it doesn’t change the fact that Europe will likely have difficulty finding enough new supply to reach 90% full by October 2023,” said Chaturvedi. “Further reductions in flows by Russia, particularly through Ukraine, would make storage refill much harder next summer.”

Overall, as of October 2022, the TTF price is projected to average 170 EUR/MWh in 2023. “While we expect prices to remain elevated in the second half of 2023 because of Europe’s increasing penetration in the global spot LNG market for supply, we also expect that under normal winter weather this season, price should average lower than is currently reflected by the forward curve in the coming months,” said Chaturvedi. 

TTF price forecast for 2023 

The Outlook for Oil

High natural gas prices are also fueling demand for oil, especially among industrial consumers. “Shortages of natural gas in Europe and the resulting spike in global LNG prices should trigger significant switching to other sources of energy. We increase our total estimates for additional oil demand from gas-to-oil switching by 700 kbd from October 2022 through March 2023,” said Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan.

However, the upside risk to oil prices have eased in recent weeks as global growth is slowing and European natural gas prices have come down from historic highs. “We peg the gas-to-diesel switching price at 150 EUR/MWh, but today at 113 EUR/MWh, benchmark Dutch TTF gas price is at about a third of its peak in August, largely due to mild weather, strong LNG imports and rising stockpiles,” said Kaneva.

Meanwhile, the forthcoming U.S.-led price cap on Russian oil exports could send shockwaves through the global oil market. J.P. Morgan Research’s baseline view is that Russia will not comply with the price cap and will try to find alternative buyers for its oil. However, the price cap mechanism has created apprehension among market participants, limiting the availability of buyers and ships needed to move Russian oil. “Russia will likely eventually be able to source sufficient tanker capacity to deliver its oil, but not just yet. Today, we believe the country is at least 1 mbd short, necessitating production cuts,” added Kaneva.

As such, assuming that the oil market tightens into year-end and that the global economy avoids a recession, J.P. Morgan Research maintains that global Brent oil price will average $101/bbl in 2H22 and $98/bbl in 2023.

The Outlook for Coal

Despite environmental concerns, the natural gas shortage has also forced many European nations to look at coal as a power generation fuel source to get through the winter. Several European countries have had to re-open some coal-fired power plants in a bid to bolster energy supplies — a move that threatens to undermine emissions targets. According to data from business intelligence company Rystad Energy, power generation using coal has surged by over 20% in France, Germany, Italy, Netherlands, Spain and the U.K. since 2021.

This rise in demand comes as Europe has placed a ban on Russian coal imports in August. Before the ban, Russia accounted for 70% of the EU’s thermal coal imports, a report by Brussels-based think tank Bruegel shows. This has led to a surge in European benchmark coal prices, which hit a record $345/ton in September 2022 — a threefold increase year-over-year.  

“This is the first time this year that the gas-to-coal switching average is sitting between the gas-to-oil switching range, highlighting an increasingly tighter global coal market,” said Chaturvedi.

Average gas-to-coal switching price level

The average gas-to-coal switching price level rose from October 2021 to August 2022, before falling in October 2022.  

What’s Being Done To Address the Energy Crisis? 

Governments across Europe have unveiled fiscal measures in response to the crisis, with countries including the U.K. and Germany implementing price caps to help consumers cope with surging costs. Additionally, the EU announced an emergency intervention in September 2022, aimed at reducing electricity usage and redistributing energy companies’ surplus revenues.

“The European Commission has proposed measures to reduce energy prices in the region, but the plans are still tentative. Many member states have already adopted some measures on a national level, so the incremental EU support is unlikely to be very significant. It’s more about leveling the playing field across the region,” said Nora Szentivanyi, Global Economist at J.P. Morgan. “While these measures might temper any further increases in household energy bills in 2023, we still expect headline inflation in the Euro area to reach nearly 11% annualized in the fourth quarter of 2022.”

Looking further ahead, European countries are taking steps to reduce their reliance on Russian supplies and bolster their long-term energy security. This includes installing new LNG import facilities in other parts of the region, improving energy efficiency and accelerating the rollout to renewables, as outlined in the REPowerEU Plan that was announced in May 2022. “By mid-to-late 2024, it could be feasible for northwest Europe to completely move away from Russian energy,” said Szentivanyi.