The energy crisis in Europe has come to an end, according to an analysis by Reuters.

From mid-2021 to late 2022, Europe and parts of Asia were caught in an energy crisis caused by soaring oil, gas and coal prices, which in some cases reached record highs, forcing households and businesses to rapidly reduce consumption.

Russia’s invasion of Ukraine and retaliatory sanctions imposed by the United States and its allies have disrupted energy supplies, which were already under pressure from the post-coronavirus recovery in industrial production.

But 18 to 24 months later, the acute phase of adjustment is over, energy stocks are restored, and prices return to long-term inflation-adjusted averages.

New energy shocks will no doubt come in the future, but the disruption associated with the end of the pandemic and Russia’s invasion of Ukraine is over. Markets adjusted.

The catch for Europe is that it traded relatively cheap Russian natural gas for relatively expensive Liquefied Natural Gas (LNG) compromising its industrial competitiveness, but this is more of a chronic problem than a crisis.

Oil

In the oil market, U.S. crude and condensate production continued to rise and surpassed their pre-pandemic peak in August 2023. Other non-OPEC oil producers have been steadily increasing.

High-frequency data from the U.S. shows commercial crude inventories at 12 million barrels (+3% or +0.26 over standard deviations) above the previous 10-year average as of mid-November, a sign that the market is fed comfortably.

Front-month Brent futures averaged $82 a barrel, in line with the average prices since the turn of the century after adjusting for inflation.

Brent’s six-month spread averaged $1.57 in trade, only slightly above its long-term average of $1.04.

Towards the end of 2022 and the beginning of 2023, fears of overproduction and the possibility of a build-up of oil stocks replaced concerns about insufficient supply and the rapid depletion of reserves.

In response, Saudi Arabia and its OPEC+ partners have repeatedly cut output to prevent an initial increase in inventories, in stark contrast to the pressure on inventories a year ago and the goal of increasing production to ease future shortages .

Natural gas

The rapid adjustment is also evident in the case of natural gas, where United States inventories have been consistently above the previous ten-year average since February 2023 and exports have risen to record levels.

U.S. natural gas futures for the first month settled at 30-year lows after adjusting for inflation, confirming that the market is responding to an initial glut.

In Europe, natural gas stocks have been consistently at record levels for the season since the end of the first quarter of 2023 following an unusually warm 2022/2023 winter and a strong fall in industrial gas consumption.

Germany’s energy-intensive industrial production is down 17% since the start of 2022 and shows no signs of recovery.

Total natural gas consumption in the 7 high-consumption countries of the European Union (Germany, Italy, France, the Netherlands, Spain, Belgium and Poland) fell by 13% in the first nine months of 2023 compared to the ten-year seasonal period before the Russian invasion of Ukraine average of the period 2012-2021.

Inflation-adjusted futures averaged €48 per megawatt hour in November, down from €223 at the height of the crisis in August 2022.

In real terms, next-year prices so far in 2023 have averaged €53 compared to €23 over the five-year period 2015-2019 and €32 over 2010-2014.

Although prices are still high, they are no longer at crisis levels and are likely to decline further during 2024.

Carbon

An even sharper adjustment occurred in the coal market, where demand fell sharply due to abundant natural gas supplies and coincided with increased coal mine production.

Next year real prices for coal delivered to northwest Europe averaged just $112 per tonne in November 2023 from a record high of nearly $300 per tonne in September 2022.

The world’s top coal producer, China, increased production by 425 million tons (10%) in 2022 and boosted it by a further 144 million tons (4%) in the first ten months of 2023.

Adjustment

Each market has experienced a slightly different adjustment process, but all are variations on the combination of faster growth in production and slower growth in consumption.

In oil, consumption grew at a slower pace due to the slowdown in the business cycle, while non-OPEC+ production rose faster, pushing the market towards stockpiling.

Russia’s exports have remained high despite sanctions through avoidance (by exploiting legal loopholes to maintain exports, increasing the use of the dark fleet of tankers, and avoiding declaring the value of cargoes).

For natural gas, Europe experienced an unusually warm 2022/23 winter, which reduced consumption, and led to a large reduction in industrial demand from the most energy-intensive consumers as industrial units suspended production.

Europe managed to replace Russian pipeline gas with LNG imports, bidding against other customers from south and east Asia in winter 2022/23, thus shifting some of the adjustment costs to poorer countries.

For coal, China’s production increase combined with rapid growth in renewable energy generation, wind and especially solar, has eased shortages and allowed stocks to grow.

Other factors that contributed to the adjustment include high levels of hydropower production in Brazil that reduced the need to import LNG and the unusually mild autumn of 2023 in northwestern Europe.

But the common factor is the sheer scale of the price increases in 2021 and 2022, which accelerated and concentrated the adjustment process in a relatively short period of time.

As a result, after the extremely painful adjustment in 2021 and 2022, production, consumption and stocks are in a more favorable state at the end of 2023 and in the horizon of 2024 and the crisis period has ended.

By John Kemp, Reuters market analyst