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Europe's Shift from Russian Gas to Pricey LNG

Europe's Shift from Russian Gas to Pricey LNG

Europe's switch from Russian pipeline…

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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McKinsey: Europe Must Cut Gas Demand To Offset Supply Shortage

  • Europe needs to keep cutting natural gas consumption due to the lack of Russian pipeline supply.
  • There are concerns about potential competition from Asia and uncertainty over the ongoing conflict in Ukraine.
  • The European Union is taking steps to coordinate joint gas purchases to refill storage for winter and negotiate better prices with international suppliers.
Natural Gas

Europe has managed to reduce natural gas consumption by more than the targets set last summer, but it may have to cut a lot more demand this year and in the coming years to offset the lack of Russian pipeline gas supply, avoid shortages, and balance the gas market.   

Faced with low Russian supply, and for many EU countries, zero supplies from Russia, Europe offset the decline in 2022 by lowering consumption by 57 bcm, McKinsey & Company said in an analysis this week. 

With further demand reductions and new sources of natural gas supply, Europe may be able to maintain the balance over the next several years, McKinsey’s analysts reckon. 

“However, multiple drivers could create a low-supply scenario and Europe would need to reduce its consumption from 2022 levels by another 55 bcm in 2023 to stabilize the market,” according to the consultancy. 

The drivers that could lead to lower supply to Europe include a spike in Asian LNG demand after a lackluster 2022, a complete halt of the little Russian pipeline gas still flowing to Europe, and a normal winter compared to the milder-than-usual winter of 2022/2023. 

“In the coming years, Europe may need to sustain and intensify efforts to reduce gas demand to manage the supply shock from the ongoing war in Ukraine, which may require a difficult, but doable, set of actions,” McKinsey’s analysts wrote. 

“However, while Europe’s energy supply and demand are expected to balance, there is still uncertainty as volatile prices and supply disruptions pose a risk to all sectors of the economy—and Europe may need to prepare to navigate these risks.” 

Between August 2022 and March 2023, the EU overachieved its gas consumption reduction target, Eurostat data showed last week. 

The EU’s consumption of natural gas dropped by 17.7% in the period from August 2022 to March 2023, compared with the average gas consumption for the same months between 2017 and 2022. The savings were higher than the 15% target set last summer. 

This year alone, consumption has been consistently below the 2017-2022 average of the respective months, with 19% reduction in demand in January, 14.7% in February, and 17.1% in March, per Eurostat data. 

Conscious efforts to cut demand, a milder winter, and demand destruction in industry have all helped Europe avoid a major gas shortage which governments feared ahead of the winter. 

Going forward, Europe needs to continue with gas-saving measures because demand in Asia could rise, and the 2023/2024 winter may not be as mild as the one that just ended. 

EU gas storage was 58% full as of April 24 and has been rising in recent weeks, according to data from Gas Infrastructure Europe. 

Warmer winter weather and subdued LNG demand from Asia helped Europe fill storage sites to adequate levels before the heating season 2022/2023 and exit that season with inventories well above historical averages.

The EU has just launched a first-of-a-kind process for European companies to register their gas purchase needs via the AggregateEU mechanism to prepare for joint gas purchases at the EU level, with the first purchase agreements expected before the summer. 

“This is a key milestone for the EU to prepare for next winter by refilling its gas storage in a coordinated and timely manner, using its collective market power to negotiate better prices with international suppliers,” the European Commission said on Tuesday. 

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Asia is helping Europe so far this year. Asian demand continues to be weak despite lower LNG spot prices, which continue to linger around two-year lows. 

Yet, there are no guarantees that Asian demand will remain low during the summer and ahead of the next winter heating season. With China’s reopening, demand for gas and LNG could rebound, increasing the competition between Asia and Europe for spot supply, analysts say.  

As fears of a gas crunch did not materialize this past winter, pulling European natural gas prices down, Europe shouldn’t count on another warmer-than-usual winter and less competition from Asia as it prepares for the 2023/2024 winter. In a market with stronger competition from Asia for LNG supply, the current European gas prices may not be enough to continue attracting spot cargoes.   

By Tsvetana Paraskova for Oilprice.com 

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