Europe looks to the USA as gas prices surge amidst shortages

Gas prices on European markets have reached levels unseen since October 2023. Although it seemed that the gas crisis nightmare was behind the EU, the cost of natural gas is rising again, exceeding $53 per megawatt-hour. This is still far from the worst moments of the energy crisis when prices approached $318 in 2022, but it is already significantly higher than, for example, in March 2024, when natural gas was priced at $31.

Europe is thus using its reserves and delaying their replenishment. As a result, according to experts from Energy Aspects, storage levels might drop to 30-35% by the end of March. According to a report from Gas Infrastructure Europe, the gas storage level in Europe has fallen from 70% at the beginning of January to 56.1% currently. For comparison, a year earlier at the beginning of January, the storage units were filled to 86%.

Additionally, weather factors play a role. Low temperatures in some areas of the USA and Europe, recorded around the turn of the year, have led to increased gas consumption for heating purposes. In the previous two years, this demand was much lower.

Europe used large amounts of gas early in the winter and is likely to want to give up Russian supplies, comments Michał Stajniak, the vice director of XTB's analysis department. Let's remember that the EU is still buying liquefied natural gas (LNG) from Russia. Still, since Putin invaded Ukraine, the transmission of Russian gas via pipelines has been gradually phasing out. Stajniak notes, "Gas will still be needed in Europe, given the emerging questions regarding the Green Deal and the recent situation related to a strong stock decrease."

Additionally, the Russian-Ukrainian gas transit agreement (which mainly reached Slovakia and Hungary) expires at the end of 2024, creating a gap that needs to be filled with supplies from other directions.

Ukrainian President Volodymyr Zelensky declared that his country is ready to increase gas transit from Azerbaijan to Europe. Azerbaijan theoretically can export 880 billion cubic feet of raw material, which is slightly over one-third of what Germany consumes (approximately 2,825 billion cubic feet).

However, Ukraine's offer does not solve Europe's gas problem. First, there are doubts about using this as a loophole for Gazprom, as Azerbaijan's SOCAR has agreements with the Russian giant. Second, the volume that can be imported will not entirely cover the gap.

The increase in gas exports by EU countries from Azerbaijan through the pipeline system, including through Ukraine's territory, will not solve the full problem of limited gas availability. Currently, the amount of gas imported to Europe from Azerbaijan is about 5-7% of the needs, calculates Michał Stajniak.

The XTB analyst reminds us that European Commission President Ursula von der Leyen signed an agreement with Azerbaijan in 2022 to double exports to Europe by 2028. So even if the current 5-7% import increases to 10-14%, it could only slightly replace the more expensive LNG, which today accounts for 40-50% of the entire import to EU countries.

Nonetheless, it is important to remember that pipeline gas prices are significantly lower if there is solid transmission infrastructure. Building new pipelines and entire infrastructure is, of course, very costly. Stajniak emphasizes that pipeline gas imports are sold through long-term contracts, while LNG gas can be purchased even in the short term.

The development of infrastructure for liquefied natural gas reception has opened up numerous import opportunities for Europe. Gas is imported to the EU from Qatar, Algeria, the USA, and Russia.

However, successive sanction packages limit Russian supplies, and in the long term, Brussels assumes the complete replacement of Russian gas with resources from another direction. Donald Trump's return to the White House prompted Europe to declare larger purchases in the USA to reduce the massive trade deficit and slightly appease Trump. Gas is expected to become a bargaining chip for the EU and a safeguard against the 10-20% tariffs on European products promised by the U.S. President.

The head of the European Commission had already spoken with Trump about replacing Russian liquefied gas with American gas. For similar reasons, interested parties are already lining up at Trump's terminals. Both Europe and Asia have declared they are willing to increase purchases from the USA.

To satisfy the demand for American gas stimulated by Trump, the Republican president has announced the removal of barriers to greater extraction and production in his country. During his election campaign, he announced an increase in exports of American LNG that would be greater than the previously planned doubling by 2030.

The question remains whether the USA will be able to meet the growing demand for LNG. "The current expansion programs in the USA for LNG show that these capabilities will significantly increase. Even with the liberalization of mining laws, building additional fields and terminals is not within a single-term perspective. However, the USA's share in gas production is steadily rising," assesses Szymon Pastucha, an analyst from the Polish Institute of International Affairs.

After the shale revolution, the USA became a major player in the LNG market. In 2024, exports of this resource from the USA reached 88.3 million tons, compared to 84.5 million tons a year earlier.

However, as the XTB expert points out, the more significant export potential from the USA may limit gas availability on the local market. And although the potential for production growth remains, domestic demand in the USA may also rise.

This is linked to the development of infrastructure for artificial intelligence. Trump has stated that the USA's energy needs could double in the coming years. Over 40% of electricity in the USA comes from gas-fired power plants. Therefore, a potential reduction in available local supply in the USA can be observed with a probable increase in demand. This must mean rising prices, evaluates Stajniak.

Additionally, this year's summer may be very hot, which will raise energy needs in the USA due to air conditioning use. This could result in a smaller increase in reserves before the next heating season. Therefore, we can ask ourselves: Is this the end of the cheap American gas era? The analyst wonders.

However, Szymon Pastucha notes that consumers from Europe or Asia are still willing to pay more for American LNG in exchange for other economic benefits. American gas is still relatively cheap, even considering all the costs associated with liquefaction and transport. Europe's massive demand means that American importers are very interested in our market, adds Michał Stajniak.