European economic recovery could push gas prices up

Exchange gas prices in Europe on January 17, 2023, for the first time since August 2021, fell below $600 per 1,000 cubic meters. m, according to the ICE exchange.

February gas futures at the TTF hub in the Netherlands at 12:04 Moscow time reached 51.7 euros per 1 MWh, or $578 per 1,000 cubic meters. m. But already at 13:27 Moscow time, prices adjusted to 54.4 euros per 1 MWh, or $608 per 1,000 cubic meters. m.

Analysts attribute the current long-term decline in gas prices to significant fuel reserves in European underground gas storages (UGS) against the backdrop of warm weather in Europe and the generation of wind farms (WPPs).

Spot gas prices on TTF have been falling since the end of August 2022, and in December the fall accelerated (Vedomosti wrote about this on December 23, 2022). At the very end of the year, the price of gas in Europe dropped below $800 for the first time since February 2022, and on January 5, 2023, for the first time since September 2021, it fell below $700 per 1,000 cubic meters. m.

This decline has replaced a long period of high quotes. The energy crisis in Europe began back in 2021. It was caused by problems with filling underground storage facilities (UGS) after record gas withdrawals in the winter of 2020-2021, as well as energy shortages as a result of a drop in wind power generation due to calm weather. Already by December 2021, spot gas prices in the EU reached a record, exceeding $2,200 per 1,000 cubic meters. m.

In March 2022, spot prices set a new all-time high, approaching $3,900 per 1,000 cubic meters. m. Then the quotes gradually declined, but in August they again switched to a sharp increase, although they could not beat the March record.

On December 19, 2022, the EU countries agreed on a gas price ceiling of 180 euros per 1 MWh, which corresponds to $1,975 per 1,000 cubic meters. m. It will come into force on February 15, 2023. Analysts then noted that setting a ceiling at about $2,000 was “comfortable for the EU”, as it would not lead to the redirection of LNG supplies to other markets and would allow Europeans to successfully compete for free gas volumes.

Stock market expertBCS The world of investment” Igor Galaktionov notes that the key factor in the price reduction was the abnormally warm weather in the European region this heating season. This, according to him, led to a revision of forecasts for the level of UGS occupancy by spring and the volume of demand for liquefied gas in the summer.

Igor Yushkov, a leading analyst at the National Energy Security Fund, agrees with him. He notes that due to warm weather, gas withdrawals from European UGS facilities are low, and storage levels are high. “This means that in 2023 the EU will have to buy less gas to prepare for the next heating season, which calms the market,” the expert says.

According to Gas Infrastructure Europe and Vedomosti’s calculations, there were 88.2 billion cubic meters in European UGS facilities as of January 15 (latest available data). m of gas, the storage facilities were 81.5% full.

The increase in wind farm generation due to windy weather also contributes to a decrease in gas use, Yushkov adds. According to the WindEurope association, the generation of wind turbines in Europe in January provided from 16.5% to 35.4% of the EU energy mix against about 10% in the summer of 2022.

Analyst FG “Finam” Sergey Kaufman adds that for the EU, “the most favorable of the predicted scenarios” has been realized. Against the backdrop of favorable weather factors, LNG supplies to Europe were at a consistently high level.

According to Yushkov, the current fall in gas prices is also affected by the decline in industrial fuel consumption in the EU. He does not rule out that in the first half of the year the price may fall below $500 per 1,000 cubic meters. m. The head of the Federal Grid Agency of Germany (regulator of gas and electricity markets) Klaus Müller said in early January that the European gas market had reached a “price plateau” (Vedomosti wrote about this on January 9).

Kaufman, on the contrary, believes that the predicted cooling in Europe in the coming weeks could return prices in the EU above $800 per 1,000 cubic meters. m next month.

Yushkov points out another risk of price acceleration in the form of growth in demand for LNG in Asia. The expert notes that gas prices in Asia are now higher than in Europe. Based on the data of the Platts index and Vedomosti calculations, gas prices in Asia last week were at $1,000 per 1,000 cubic meters. m. Kaufman agrees that the recovery in demand for LNG in China could lead to “a partial redirection of supplies to the east.” “In the future, this may create an outflow of LNG from the EU and a shortage in the European market,” Yushkov said.

Yushkov admits that the peak of gas consumption in the EU in 2023 may occur in the summer, in case of hot and calm weather. Also, in his opinion, in the second half of the year, an increase in demand from China may begin. Another driver for increasing demand for fuel, in his opinion, could be the recovery of the European economy, which “will push prices up.”

Galaktionov also draws attention to the fact that even current prices are still about three times higher than the levels typical for the last ten years.