The price of European gas has crooked

Gas prices in Europe continue to decline for the fourth week in a row. Unusually warm weather is delaying the start of withdrawals from underground storage facilities, which have reached almost 94%. These circumstances alleviate concerns about gas shortages in the heating season. Analysts believe that LNG supply in Europe may decrease due to the fact that Asian traders return to buying fuel for their markets, and gas prices under longer-term contracts already include a factor of colder weather, which will also affect the spot market in winter .

TTF futures fell below €100 per MWh for the first time since June. During October 24, the price of the November futures fell by 15% to €96.5 per 1 MWh, or about $990 per 1 thousand cubic meters, the spot price for TTF for the day ahead amounted to €29.5 per 1 MWh, or about $310 per 1,000 cubic meters. The main reasons are unusually warm weather in Europe, as well as high gas reserves in underground storage facilities (UGS). They reduce fears of gas shortages in winter and allow for longer injection into UGSFs. Usually, gas is taken from them after the twentieth of October.

Temperatures in the UK and NW Europe will be well above seasonal this month, with warmer weather expected into early November, according to Refinitiv. The UGS filling level, according to AGSI+, is 93.43% on average in Europe, or about 100 billion cubic meters. In the UK, UGS facilities are completely filled, in France – by 99.51%, in Denmark – by 99.74%, in Germany – by 97%, and in the Netherlands – by 92.5%.

However, gas prices are still three times higher than the average before the start of the heating season, and a sharp decline in supplies from the Russian Federation could lead to winter shortages and power outages. The EU countries are exploring the possibility of introducing a temporary “dynamic price corridor” at the TTF hub, limiting gas prices in electricity generation and mandatory joint gas purchases. Discussing these measures will continue this week.

Gas prices are traditionally difficult to predict due to the weather factor – “while it works in favor of lower prices, while quotes are too high for there to be steady demand from the energy-intensive industry,” says independent analyst Alexander Sobko. In addition, large-scale shipments of LNG continue to flow to Europe. Stocks in the tanks of receiving terminals are filled to the limit, their productivity is about 61%. Off the coast of Spain, Portugal and the UK, dozens of ships are waiting for their turn to unload.

But Asian buyers are also beginning to prepare for winter, and they intend to purchase additional LNG shipments in the coming months. It is worth expecting that Asian importers, who also act as traders, will bring gas “home”, Alexander Sobko believes.

The main part of this gas is purchased with a price pegged to oil or domestic gas prices in the United States, that is, for these companies, LNG is much cheaper at cost than the price of European exchanges, the expert explains.

During a period of reduced demand from heating, he specifies, part of the volume is sent for resale, but in the heating season they “will be needed at home.”

“It will be interesting to see if we will see a paradox when exchange prices in Asia remain below European ones, but part of the LNG will still leave due to the voluntary redirection of volumes by national importers,” notes Mr. Sobko. “We have already seen how the Chinese regulator advised to do just that for their oil and gas companies. Of course, this will not affect the behavior of LNG traders from the majors or exporters group.”

According to Ivan Timonin from Vygon Consulting, an increase in demand, for example, against the background of a cold snap, can most likely return quotes to their previous values, which is also confirmed by forward curves: contracts for gas supplies to the European market in December, for example, are already estimated at almost $1.5 thousand per 1 thousand cubic meters, which is almost one and a half times higher than the current level of spot prices. Taking into account the upcoming changes in the weather and growth in demand, the expert believes, quotes on the European market will most likely stay above $2,000 per 1,000 cubic meters, with the possibility of even more serious surges on some days.

Tatyana Dyatel