Gas prices have fallen across the curve in recent weeks, returning to levels last seen before the war in Ukraine (but still higher than they were before the covid recovery began in September 2021). The reasons for these reductions appears to be the fact that mild weather has seen much lower levels of gas demand so far this winter than usual, and comments by the Russian Deputy Prime Minister suggesting that the Russia may re-open the Yamal pipeline through Poland. The opening of new LNG import terminals has also reduced Europe’s reliance on Russian gas.
The reduced demand for gas across Europe this winter means that storage levels are much higher then seasonal norms, and the bloc is on track to end the winter need to buy less over the summer than would normally be the case. Based on average Q1 consumption over the past five years, EU gas storage facilities could be almost half full (c 47%) at the beginning if April – higher than the 5-year average of 35% and possibly the highest seen in five years. This assumes the rest of the winter is not colder than normal, or that other factors do not increase demand – as gas prices fall they will pass the coal-to-gas switching level for electricity generation, increasing gas consumption.
At these prices the EU cap is unlikely to have an impact, and while some colleagues have speculated that the cap is leading traders to migrate their activities OTC, similar price reductions can be observed in the OTC indces. The prospect of increased use of gas in electricity generation is causing concern:
“Market participants believe that the European gas balance is not comfortable enough to afford a significant boost in gas demand for power generation, particularly as the price decline could also trigger a restart of some industrial demand,” – EnergyScan, Engie
There are further worries that since the price differential to JKM has disappeared, LNG cargoes are heading to Asia instead of Europe, just at a time when Chinese demand is expected to recover following the end of its zero covid policy, which has reversed faster than expected. This is exacerbated by the slow return of the Freeport LNG terminal in the US whose re-start has been further delayed to the second half of January.
“In case cargoes are diverted, substantial amount of baseload volumes are missing, setting a natural floor to price levels…Eventually Europe has to attract LNG cargoes during the year to replace Russian supply,” – Simone Turri, head of western European structured trading at MET International
The question in everyone’s minds is whether these price reductions will be sustained. Colder weather, increased consumption through coal-to-gas switching, and LNG diversions to Asia can all threaten European gas balances, and we have seen dramatic price reversals in the past for example the dramatic increase in prices at the end of August due to Nord Stream concerns was quickly reversed. Attention is turning to next winter which has seen prices reduce by much less than this winter. Lower prices make it harder for Europe to secure LNG, and optimism around Yamal might be mis-placed…there has been no further indication the pipeline might re-open since the comments in mid-December from the Russian Deputy Prime Minister. My feeling is that it is too early for optimism…