This past winter has revealed the degree of natural gas demand destruction that is possible within Europe under extreme market conditions. Total European (including the UK and Turkey) natural gas consumption from October 2021 through April 2022 declined by -10.9 mtlnge (millions tonnes LNG-equivalent), or -3.6%, versus the prior year. Without this decline in demand, European gas inventories would have reached their lowest levels on record by winter’s end.
In order to isolate the impact of natural gas prices on demand, we must normalize for weather (HDDs) and economic activity (GDP). Given the relatively mild winter that Europe experienced in 2021/2022, this uncovers a more limited level of price-driven demand destruction, of about -8.2 mtlnge, or -2.8%.
We can then gauge the relationship between European gas demand deviations and pricing. Prompt month Dutch TTF gas prices have shown a highly negative correlation of almost -90% versus normalized monthly deviations in European gas demand.
Figure 1. Prompt TTF Prices (lagged) vs. European Gas Demand Deviations (normalized): Oct-2021 to Apr-2022
In the figure above, we see that significant reductions in European gas demand do not materialize until TTF pricing reaches the $15-$25/mmbtu range. Even then, it appears limited to less than -5%. Demand destruction within the -8% to -10% range requires prices of $25 to over $30/mmbtu.
We will also note that there is an approximately 3 to 4 month lag between natural gas price levels and demand deviations. It takes time for gas price changes to flow through and affect behavior within various gas consumption sectors. We therefore have reason to expect that gas demand destruction will continue to make a substantial contribution to Europe’s goal of balancing its gas market while greatly reducing or eliminating Russian gas imports. However, this demand destruction comes at a price, quite literally.
In a future post, we hope to discuss the level of total gas demand destruction to be expected within Europe given current forward price curves.