Europe has forgotten about Russian gas – Kommersant

Against the backdrop of an oversupply and hot summer forecasts, gas prices in Europe fell to June 2021 levels. Gas futures following trading on May 18 fell below €30 per 1 MWh, or about $340 per 1,000 cubic meters. Prices have been falling in recent months due to large LNG supply, high inventories and falling gas demand on the continent. Additional factors that pushed prices down could be the first joint tenders for the purchase of gas by the EU countries, as well as an increase in the share of wind generation in electricity generation. According to analysts, with a further decline in demand in summer, gas prices may return to the “old normal” of $220-280 per 1,000 cubic meters.

European gas futures fell below €30 per MWh for the first time since June 2021. June futures, traded on the TTF site in the Netherlands, the main European gas hub, fell by 6.8% on May 18, to €29.77 per 1 MWh, or about $340 per 1,000 cubic meters. The day-ahead spot index fell to €29.55 per MWh (about $330 per 1,000 cubic meters).

Although prices are down about 60% since the beginning of the year, they still remain twice the five-year average. Gas prices reached their peak of €345 per 1 MWh in March 2022.

Strong LNG imports, high UGS stocks emerging from an unexpectedly warm winter and a slow recovery in demand in Asia have contributed to falling prices in recent months.

In the coming months, the EU will be busy replenishing gas reserves for the upcoming winter, but with minimal volumes of pipeline gas from the Russian Federation, which lost its place as a key supplier on the continent after the outbreak of hostilities in Ukraine.

The first joint tenders for the purchase of gas by the EU countries, held on May 10-15, could give an additional impetus to lower prices. These purchases, which also aggregate demand from non-EU countries such as Ukraine and Moldova, offer a discount for large gas purchases. As part of these purchases, EU members through the single trading platform AggregateEU ​​must purchase 15% of the volume of gas that is needed to fill storage facilities up to 90% for the upcoming winter season. As a result of the auction, 10.9 billion cubic meters of gas were purchased. This is only about 3% of last year’s total European consumption, but nevertheless, aggregate purchases can help EU countries replace lost supplies from the Russian Federation. Now such purchases will take place every two months throughout the year.

Warm weather is expected in NW Europe in the coming weeks, which will dampen demand for heating. But at the same time, summers in Europe, primarily in Spain, Italy and France, are expected to be hotter than usual, which could increase the need for air conditioning.

According to AGSI+, Europe’s gas storage facilities are now 64.3% full and, based on current storage filling rates, they could be 90% full by the end of August.

Renewable energy generation covered up to 20.7% of the total electricity generation in the EU countries, as of May 17, this is the maximum level in more than a month. At the same time, in Denmark, wind farms account for more than 100% of generation.

Asian LNG demand continues to grow at a slower pace than expected. June futures contract JKM Platts (Japan Korea Marker), reflecting the cost of LNG spot deliveries to Northeast Asia, is trading at $400 per 1,000 cubic meters.

If the EU countries continue to reduce demand for natural gas (in March, consumption was 12% lower than March 2022), we may see TTF prices return to the “old normal” of $220–280 per 1,000 cubic meters in the summer, in this range prices have been in place since the mid-2010s, believes Sergey Kondratyev of the Energy and Finance Institute. “Only a return to the Chinese market can significantly affect the dynamics of prices in the EU, but so far China is betting on coal generation and gas imports are recovering more slowly than we might expect (plus 10% yoy in April),” the analyst says .

Tatyana Dyatel