IEA: European, Asian Gas Prices to Remain High

European and Asian natural gas prices are expected to rise to record annual average highs in 2022 as the market remains tightly supplied for most of the year, according to the International Energy Agency (IEA).

Prices are expected to fall somewhat in the second half of the year as available supply picks up, but prices will remain above historical averages for both Europe and Asia, the IEA forecasts.

"Restocking needs in Europe and lower liquefaction capacity additions are set to exert upward pressure on gas prices," the Paris-based think tank said in its most recent quarterly gas market report.

European gas prices are expected to average $26 per million Btu for the year and Asian spot prices $27/MMBtu, the IEA said.

That compares to average prices at Europe's benchmark TTF hub of $31.50/MMBtu in the fourth quarter of 2021 and Asian spot LNG prices of $35/MMBtu during the same period.

The IEA said European gas prices have been driven higher by lower Russian pipeline gas deliveries, lower storage levels and the region's own declining production.

Asian prices, meanwhile, have been propped up by competition with Europe for spot LNG cargoes, LNG feed gas supply issues in Malaysia and Indonesia, as well as unplanned outages at Australian liquefaction plants.

US Henry Hub prices are expected to average $4/MMBtu in 2022, close to 2021 levels and lower than the fourth quarter average of $4.8/MMBtu, which was the highest quarterly average since 2008.

European Demand to Fall, Imports to Rise

European gas demand is expected to fall by 4% to 527 billion cubic meters in 2022, reflecting the growth of renewable power generation and a loss of market share as lower prices make coal-fired power generation more competitive, the IEA said.

Industrial gas demand in Europe is expected to recover to close to pre-2020 levels, even though high gas prices led to production curtailments at several manufacturing plants in the region last year.

Europe's overall gas consumption grew by 5.5% to 552 Bcm last year.

Despite lower demand, Europe will still need to import 2% more gas in 2022, driven by restocking as storage levels had fallen 15 Bcm below their five-year average by the start of January 2022.

Europe's LNG imports are expected to decline marginally in 2022 from 107 Bcm last year.

Europe's own gas production is expected to rise slightly to 207 Bcm in 2022 from 204 Bcm in 2021, as output recovers in the UK and Norway (neither of which belong to the EU).

China Slows Down, But Still Drives Asian Demand

Chinese gas demand is expected to grow by 8% to 394 Bcm this year, a lower growth rate than the 12% seen in 2021. That reflects slower economic growth, high import prices in the first quarter of 2022 and the normalization of seasonal weather patterns.

However, the IEA still expects overall Asian gas demand to increase by 5% year on year to 950 Bcm in 2022, with China accounting for 60% of that growth.

Asian gas demand will also be driven by increases of 8% in India and 5% in "emerging Asia," which includes Pakistan, Bangladesh, Indonesia and Thailand.

Low Upstream Gas Spending

Upstream spending on natural gas grew by some 10% in 2021 from a record low of around $100 billion in 2020, the report showed.

But spending remains less than half of the annual level projected under the IEA's Stated Policies Scenario and 12% below its net zero scenario for 2021-30.

Current high gas prices create "strong incentives" for producers to increase upstream investment, the IEA said.

But uncertainty about demand — because of the Covid-19 pandemic and the energy transition — combined with investor pressure on US producers to exercise capital discipline and for big IOCs to diversify from fossil fuels "could lead to a muted supplier response," the IEA said.