Gas Concerns Inflated, Carbon Prices to Fall, Nordic Consumption at 20-Year Low

Gas Risks Real, but Exaggerated

European gas markets have seen a volatile start to the winter season, with geopolitical developments sparking supply fears. The pipeline damage between Finland and Estonia brings back memories from the Nord Stream sabotage one year ago, highlighting infrastructure risk. Another cause for worry is the chance of escalation of the war in the Middle East, potentially disrupting the wider energy complex. On the fundamental side, Norwegian gas exports were at multi-year low levels in September.

However, Norwegian exports have recovered, and the fundamental impacts from geopolitical events are small so far. The pipeline damage in the Gulf of Finland may have been caused by an accident, not sabotage. An escalation of the Middle East war to the point where shipping routes are closed off is unlikely. A risk premium in the market is certainly justified, but it may be somewhat exaggerated. We have a slightly bearish view for gas prices this coming winter compared to the market.

Carbon Market Adjustments

As we earlier this year have seen medium term and long-term policy developments being settled, the market has increasingly been focused on demand side fundamentals this autumn. Developments in coal to gas fuel switching prices have often impacted carbon prices over the last months. Over the course of the last 12 months, we see that fundamentals have been pointing much in the bearish direction, and the market is now well aware that emission levels for 2023 will drop tremendously from 2022. Due to the weak economic outlooks affecting emissions, we are expecting carbon prices towards the end of the year to turn out well below the average level of the last couple of months.

Nordic Energy Consumption Trends

We will probably see the lowest consumption in 20 years for both Europe as a total and for the Nordic region. We still see further reduction in the consumption compared to last year for many countries. However, some countries have slowly started to increase consumption during the past month. Low consumption and some improvement in nuclear and hydro, in addition to new renewable production from solar and wind generation, have contributed to massive downscaling of the thermal production this year. We are now facing a total forecast of 280TWh reduction in production from gas, coal and lignite in Europe this year.

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