Concerns that a reopening of China’s economy from Covid lockdowns could trigger a ‘tug-of-war’ with Europe for gas supplies are likely overstated, according to a new S&P Global Commodity Insights (SPCGI) analysis.

When it comes to the pressures on Europe’s gas market in 2023, it is the behaviour of European consumers and Europe’s own domestic demand that will be critical: how much consumption will return as prices alleviate and how much is permanently lost.

“The current preoccupation among traders and analysts is that the reopening of the Chinese economy, following the lifting of the government lockdowns, could trigger a ‘tug-of-war’ for commodities and reignite prices,” observed Michael Stoppard, Chief Strategist Global Gas at SPGCI. “The risk of a surge in demand may, however, be less of a risk for gas than for other commodities.”

Gas surge in China considered less likely

A surge in gas demand from China is considered less likely than other commodities with growing renewable generation, wider coal availability and high spot LNG prices expected to be key constraints on Chinese gas demand growth in 2023. 

The coal-to-gas policy – which has been the key driver behind double-digit Chinese gas demand growth in recent years – is also taking a back seat, with current policy priorities being economic growth stability and energy supply. Pipeline volumes from Russia to China are also expected to ramp up, which ironically frees up more LNG available to Europe. 

“We expect China to remain a cost-conscious buyer of spot LNG given its other options,” outlined Jenny Yang, Senior Director Asia Gas at S&P Global Commodity Insights. “We also expect other key emerging markets for LNG –notably the South Asian markets – to exercise caution. These markets will continue to provide some floor support for LNG prices, but will not drive another sustained price spike.”

European gas market’s biggest unknown? It’s own demand

Heading into what is likely its first full calendar year with only minimal volumes of Russian pipeline gas, the biggest unknown shaping the balance of Europe’s gas market will be its own demand.

 

European demand was down 68bcm in 2022 – a significant volume equivalent to 12 per cent of global LNG demand in 2022 – primarily due to price-induced declines in the industrial sector and weather-induced declines in the residential sector. 

S&P Global Commodity Insights tentatively estimates that about one-quarter of lost industrial demand may be permanent. The rest is price- or weather-sensitive.

A key driver of demand will be the power sector, influenced by three factors in particular: on-going weakness in overall power demand; a return of shuttered French nuclear power; and a continued rise in output from renewable energy sources.

Europe’s gas storage levels are another crucial factor. There was a massive build-up of stocks in 2022 – from extremely low levels to near-maximum capacity. A significantly smaller build-up will be required this year, with stocks expected to exit the 2022/23 winter heating season near record levels at 60-per-cent fill (63Bcm). That implies a need of only 41Bcm to restock before the next winter – 58-per-cent less then what was required last year.

“The big unknown is not so much Chinese LNG demand or emerging-market LNG demand. It is Europe’s own gas demand,” confirmed Alun Davies, Head of European Gas at SPCGI. All eyes in 2023 will be on the response of European gas demand to price movements.” 

The evolution of European and global gas markets will be among the key topics explored at leading energy conference CERAWeek by S&P Global in Houston, from 6–10 March.