– We succeeded surprisingly well – E24

SEB believes the energy crisis is over, and is lowering its estimates for gas prices in Europe in 2024. But it will not be cheap. – The new normal, says SEB analyst Oli Hvalby.

SEB has provided new estimates for gas prices, and expects prices to be slightly lower in 2024 than they were previously.

We believe that the energy crisis in Europe is now over. What's happened from mid-2021 so far is the worst, SEB analyst Oli Hvalby tells E24.

The brokerage company expects the European gas price level to reach around 40 euros per megawatt hour in 2024.

It is roughly in line with the price level of the fall, but is a downward revision of SEB's previous 2024 estimate of €52.5 per MWh.

But even if the severe crisis ends, Europe is unlikely to return to earlier times, when industry and consumers could enjoy relatively cheap Russian gas. SEB estimates the gas price at 40 euros per megawatt hour for the years 2025, 2026 and 2027.

-This is the new normal. Prices are now expected to rise for a longer period of time. Prices are expected to be roughly double normal, Hvalby says.

– This affects electricity prices, including Norwegian electricity prices. He adds that the most expensive energy is the one that drives the level of electricity prices in Europe, which is gas energy.

-You have had a great privilege

Gas prices this fall averaged about 37 euros per megawatt hour, which is equivalent to an oil price of about $64 per barrel. This is 1.8 times higher than historically normal European gas prices.

-We have been very privileged with cheap energy for a long time. Unfortunately, that time may be over. Energy must be priced differently than before. The worst of the crisis is over, and we have managed things amazingly well. But there's no doubt there will be an expensive system in the future, says Hvalby.

– A prolonged period of fairly high gas prices, what does this mean for industry and activity in Europe?

– It was a big problem. The industry has been built on cheap Russian gas, and it has become very dramatic with these high prices. The analyst says that those who cannot produce at today's prices are closing their doors or using half their machines.

– Gas prices remain low in the United States, so Europe becomes less competitive. This was a complete crisis for Europe's competitiveness. “We are now gradually returning to some kind of normality, but it will take a very long time,” Hvalby adds.

The brokerage house expects that gas prices in the European Union will reach between 80 and 90 percent of oil prices in the future. In the past, the normal level of gas prices ranged between 50 to 60 percent of the price of oil.

Furthermore, SEB is not changing its oil price estimates at this time. The brokerage expects the price of oil to reach $85 per barrel in 2024, $87.5 per barrel in 2025, and $90 per barrel in 2026.

– Completely erased

SEB believes gas prices will remain high in the coming years because China is expected to bid more for LNG, while demand in the European Union is expected to increase and LNG imports to decline.

According to Hvalby, the market is now pricing gas at around €34 per megawatt hour for the whole of 2024.

– He says: – We believe in stronger prices than that, especially because we expect demand from the industry to return.

Price forecasts usually vary with seasons, but now the market expects completely stable prices in the future.

– Seasonal fluctuations in the price of gas have been completely erased. We believe that industrial demand will rise, because large consumers will begin to lock in today's prices and will not wait for a possible price drop, says Hvalby.

– Adorable

Normally, Europe would have received about 1,000 terawatt-hours of Russian gas this year, but instead it filled with 1,400 terawatt-hours of liquefied natural gas. Has anyone been able to replace the Russian folders?

– The adaptation has been absolutely phenomenal. “In 2021, 2022 and 2023, things went surprisingly well, and things went surprisingly quickly,” Hvalby says.

– It is not only the adaptation in Europe that is impressive, but also the adaptation globally. With these high prices, many players will reject the gas and adapt, and Europe will receive larger quantities than it would have otherwise. “I didn't think adaptation would happen so quickly,” he adds.

– I've been lucky so far

Last month, the price of electricity in southern Norway rose to more than one kroner per kilowatt-hour, while at the same time in the crisis year 2022 the price was between three and five kroner per kilowatt-hour.

In the run-up to Christmas, the price of electricity fell to levels of around €50 per kilowatt hour.

With gas inventories in Europe fairly full and the weather warmer than usual, things don't look as bleak for gas and electricity prices this winter as they did last year.

– Could this change quickly if the weather turns cold and consumption rises in Europe or if Asia starts bidding more for LNG cargoes?

– Things can go faster than you think, and we've seen that before. For now, the relatively low prices are based on strong stock fill, and lower than regular drafts as they are moderate in Europe. We've been very lucky there so far. The weather will likely be a few degrees warmer than normal in the winter months, so that can look beautiful, Hvalby says.

But an extremely cold period of a few weeks could cause a huge drawdown on Europe's storage, which now stands at 88%, or 1,000 terawatt-hours. You can burn it in 5-6 weeks if the weather is very cold. You may not be quite ready for that, says SEB analyst.

The Middle East can create challenges

Europe replaced importing Russian gas with importing liquefied natural gas by ship. Part of this liquefied natural gas arrives on ships from Qatar and is transported through the Suez Canal.

There are now significant challenges there, and many players are choosing to sail their ships around Africa instead, which takes longer and contributes to higher shipping prices.

– What is the impact of the situation in the Middle East on gas prices?

– This is another annoying factor to think about. I think the market is underestimating this a little bit. If you hit the ground, you could hit very hard, Hvalby says.

– Equinor, BP and other players chose to drop the Suez Canal and circumnavigate Africa instead. This leads to higher shipping rates and higher costs, but the market has not reacted to it yet. In fact, rates have decreased. This may be because the market in Europe is comfortable with plenty of gas in stock and relatively mild weather, he says.