Optimism for the coming winter in Europe
Natural gas prices in Europe fell to their lowest level since the start of the energy crisis, boosting hopes of a stronger economic recovery as energy pressures ease.
Europe’s benchmark TTF hit a low of 35.20 euros per megawatt hour on Friday, a level last seen in July 2021, when Russia was beginning to squeeze power reserves from Europe ahead of its invasion of Ukraine.
It subsequently rose slightly to close the week at €35.95. The benchmark TTF index peaked at more than €340/mwh last summer after Russia cut gas exports to Europe, fueling inflation and skyrocketing power bills.
Market factors estimate that the drop towards 35 euros/mwh reinforces the hopes of a return of prices to normal levels.
A mild winter and alternative gas supply routes have kept inventories high, with warehouses filling at seasonal highs.
warehouses are full
According to the Aggregate Gas Storage Inventory (AGSI+), the occupancy rate of natural gas storage exceeds 60%, some 20 percentage points above the average of the last five years.
Speaking to the Financial Times, Morgan Stanley analyst Martijn Rats argued that Europe is now in a position to top up natural gas reserves to 100% even if Russian supplies drop to zero. He stressed that lower prices would also reduce the supply of liquefied natural gas by sea, through which Europe has tried to replace Russian flows. “At some point, LNG input will have to decrease to prevent overfilling of reserves.”
The fall in oil prices creates additional relief, with Brent crude oil approaching $75 a barrel.
However, despite the drop, natural gas prices remain high compared to historical levels. In 2019, the average TTF was less than €15 and the pre-crisis price peak was €29.17 in 2018, which even adjusted for inflation is still slightly below where prices are trading today.
As the FT points out, gas traders and analysts gathered at the annual Flame conference in Amsterdam this week stressed that there should be no complacency and warned that Europe could still face challenges next winter.
“We got through it because we had a mild winter and Chinese demand [για φορτία LNG] was reduced. . . it’s luck,” said James Watson, general secretary of Eurogas, an association representing the wholesale, retail and distribution sectors.
“Is that the strategy we are going to have now? We should be lucky for three or four years in a row for supply and demand to even out. That’s not the right way to do it.”
EU LNG imports from Russia reached 22.1 billion cubic meters last year, 39% more than in 2021 and accounted for 16% of total maritime imports for the year, according to Refinitiv data. This increase in Russian imports also helped boost EU stocks.
“It looks like Europe will have too much gas this summer and not the other way around,” said Natasha Fielding, director of gas prices for Europe at Argus Media, an industry data service.
The European Commission is targeting gas storage levels of 90% capacity by early November, but Fielding estimates it could reach that target in July or August.
Unlike oil and oil derivatives, Russian gas is not subject to sanctions. As a result, record EU imports of Russian LNG to date have filled Russian coffers with billions of dollars through taxes on Russian gas companies.
In fact, Simpson urged EU companies to stop buying Russian LNG. The bloc’s energy ministers also agreed in March to allow member states to temporarily curb gas imports from both Russia and Belarus, a deal that has yet to be negotiated with the EU parliament.
However, any move to limit or ban Russian LNG could hamper efforts to fill up storage for next winter.