Current Market Overview
The energy market in 2024 experienced an initial
drop in prices early in the year, despite it being the
winter season. However, this was followed by a
gradual increase, driven by unplanned gas outages
and heightened geopolitical tensions.
While underlying market fundamentals remained relatively stable, the influence of geopolitical events proved significant. The year concluded with the expiration of the Russia/Ukraine gas transit agreement, leading to a cessation of Russian gas supplies to Eastern Europe. The continued loss of Russian gas has placed sustained pressure on Europe, particularly in energy-intensive industrial sectors. As a result, industrial output in key regions has declined, and Europe’s overall gas consumption has dropped without sufficient alternative sources to offset the shortfall, as illustrated in the chart below.
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The supply of gas to Europe from non-Russian sources has remained relatively stable (as shown in the blue/grey sections), but the significant drop in Russian gas supply since the Russian invasion is evident. While some of the shortfall has been mitigated by increased output from renewable energy sources, it has not been enough to fully bridge the gap. Consequently, Europe has effectively been forced to ration its gas supplies.
Winter Cold Snap Demand
Depletion of Storage facilities in UK and EU
2025 has begun with a colder winter compared to the past two years, leading to a significant increase in gas consumption and a corresponding drawdown on storage reserves. Despite European storage facilities achieving the 90% target by late August, as required by the 1st of November mandate, current levels have dropped to approximately 70%. For context, storage levels stood at 81% at this time last year and 82% in 2023. Should the cold weather persist through the remainder of winter and into early spring, it will likely impact the summer gas storage replenishment period. With gas prices already elevated, the cost of replenishing reserves could increase further, potentially driving up energy bills. The chart below highlights current EU storage levels, as shown by the 2024 red line, which has declined steadily since November.
Ongoing Conflicts & Middle East unrest:
The burden on energy prices
The ongoing conflicts in Russia/Ukraine and the Middle East continue to disrupt energy markets, driving volatility and sharp price movements. Nearly three years into the Russia/Ukraine war, a resolution remains elusive. The recent cessation of the Russia/Ukraine gas transit agreement marks another major blow, further curtailing gas supplies to Europe. While the continent had already begun reducing reliance on Gazprom and diversifying its energy sources, this latest disruption underscores the shock factor such shifts impose in the short term. However, in the long run, these changes foster greater self-sufficiency and diversification. In the Middle East, the situation remains equally volatile. Any flare-ups in the region could have profound consequences on global energy supplies, given the region's critical role in energy production and export. Close monitoring of both conflicts is essential, as their outcomes may significantly influence energy market stability and pricing in the months ahead.
Ukraine Transit Agreement with Russia Ends
Likely impacts examined:
For Q1 2025, the gas transit agreement between Ukraine and Russia is poised to have a significant impact on the European energy market, including the UK. The current agreement, which has been a vital conduit for Russian gas to Europe, ended on the 31st December with the Ukraine stating that it will not be renewing it. This change ended the flow of Russian gas through Ukraine, prompting major shifts in supply dynamics.
Key Factors and Outlook:
Impact on Europe:
01
Europe, which imported 45% of its gas from Russia in 2021 (now down to 15%), faces potential gas shortages.
02
The loss could intensify competition with Asia for liquefied natural gas (LNG) and raise costs.
03
Ongoing Conflicts & Middle East unrest – burden on energy prices?
However, Europe's high storage levels (93% full) and underused LNG regasification capacity (38%) provide some relief.
While alternatives were discussed, as a way to continue transiting Russian gas into Europe, these ultimately failed to materialise.
What are the implications for UK Energy Prices:
The impact may be limited but not negligible, for the following reasons:
- Diverse Energy Sources: The UK is less reliant on Russian gas than mainland Europe, sourcing most of its gas domestically, from Norway, or as liquefied natural gas (LNG) from global markets. Market Independence
- Market Independence:The UK exited the EU’s internal energy market, reducing its direct exposure to pipeline gas disruptions.
- High LNG Import Capacity:With robust LNG infrastructure, the UK can more readily pivot to global suppliers without depending heavily on Russian pipelines.
- Loss of Russian gas: Will not directly impact Northwest Europe's gas balances, more demand from eastern markets like Slovakia could draw additional volumes from the Western supply pool.
A Trump Government – what can we expect?
More for them, less for us?
U.S. Oil and Gas Expansion Under Trump’s Second Term
U.S. oil and gas producers anticipate easier operations under Donald Trump’s
incoming administration due to streamlined permits, which could boost
production and exports of liquefied natural gas (LNG), crude oil, and refined fuels.
However, finding stable markets for these exports could become challenging,
especially in Europe.
European Trade Concerns
Europe is the largest buyer of U.S. LNG and crude oil, with almost half of these
exports sent there in 2023. U.S. energy exports have profited greatly, but high
prices are pressuring European consumers, speeding up their shift to renewable
energy. A dip in European energy demand has already reduced U.S. LNG imports
by 20% in 2024 compared to 2023. Q1 is peak winter season, when the UK relies
heavily on LNG for heating & electricity. Any disruptions or higher costs in LNG
imports will directly impact UK energy prices.
Tariff Risks and Trade Battles
Trump’s potential tariffs on European goods could trigger retaliatory actions,
possibly targeting U.S. energy exports. Europe, reliant on alternatives like Middle
Eastern oil, could cut U.S. purchases without significant harm to itself, hurting U.S.
exporters.
Challenges for U.S. Energy Exporters
Redirecting exports to Asia is feasible but less efficient. Shipping costs and times
would increase significantly, reducing profitability. The risk of trade disputes with
Europe might complicate selling the expected increase in U.S. energy production.
There is potential for moderately higher prices due to seasonal demand and
geopolitical uncertainties, but severe price spikes are unlikely unless there are
extreme weather events or geopolitical shocks. If, as stated by Trump, and that is
a big ‘if’
, that he will end the wars, then could we see Russian gas returning to
Europe and an easing of prices?
An Increased LNG Supply:
Could this suppress prices?
According to Drewry, LNG shipping rates may soften in 2025 as fleet growth outpaces liquefaction capacity expansion, preventing any significant recovery in rates. The expectation is that LNG shipping rates could soften in 2025. While the near-term prices may increase if Europe faces a harsh remainder of winter, which could tighten the global LNG market, the long-term outlook could help to stabilise prices with the additional supplies, helping to go some way towards covering the loss of Russian gas. The start of 2025 has already seen a healthy level of expected LNG cargoes for the UK, adding bearish sentiment, to the recent price rises. This could help to soften energy prices should supplies continue arriving & temperatures don’t sustain a lengthy cold period. While European efforts to secure alternative supply routes and increase storage capacity may mitigate risks to some extent, these shifts underline the importance of robust energy planning for UK consumers during the transition period.
Targeted Charging Review (TCR’s)
All energy users pay towards keeping the energy network running. Historically, these charges have been shared based on energy consumption.
Global Economic Indicators
We need to keep a close eye on the global economy as well as the effects that the U.S. elections in November could have on financial matters. Should we witness a slowdown in the economy, this would lead to a reduction in demand for energy, which in turn would lead to lower prices. Of course, there’s always the flip side, where energy prices could rise if the economy bounces back.
If interest rates are cut, this could help ease economic growth. The UK recently cut its rates, but we need to see what other countries do, particularly in the Asian markets. If their economies start to grow, this could lead to an increase in demand, which in turn would create competition with Europe for energy supplies. Presently, demand in China remains low, as does its oil refinery output.
On the 18th of September, the U.S. cut its interest rates in an attempt to stimulate economic growth. However, this can take time for its effect to materialise. Some see an interest rate cut as a sign of a weak U.S. labour market though. Will the UK follow suit next month in further reducing their interest rates?
How can advantage help?
Our sustainability department continues to offer an ever-increasing range of products and technology aimed at reducing energy consumption and associated costs as well as driving down carbon emissions. We will of course continue to keep you updated about these initiatives, but please do reach out to your designated point of contact should you wish to explore your options in this regard.
In terms of procurement, we will continue to monitor markets with a view to helping customers navigate the unprecedented circumstances and ascertain when constitutes the best time to seek a contract extension.
Our popular flexible procurement options continue to be an option for an increasing number of clients on either a standalone basis or as part of a grouped basket. This often facilitates access to day/month ahead trading markets which have proved to be particularly beneficial to many clients over the winter period.
Here we take a detailed look at the current international and UK market drivers.
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