The gas price trap

By | May 14, 2023

Pressures on the European and global natural gas market have eased since the beginning of 2023, mainly due to favorable weather conditions which were reflected in lower demand.

The mild winter combined with the early mobilization of the EU to replace supplies from Russia with high LNG purchase rates, our led us out of winter with European gas tanks half full – well above the five-year average of around 33% – and market prices around ten times below last year’s record levels.

So, entering the supply period for next winter with warehouses 50% or 55% full -we remind you that these supplies will also be made through the common natural gas market platform- the EU will really need a lot minor natural gas supplies.

This “comfort” coupled with the fact that natural gas on Friday at the TTF hub closed at 32.7 euros per megawatt hour, give Europe another “air” in relation to the scare suffered in 2022, when Russia reduced flows of natural gas to Geria Epirus at approximately 80%.

This “air”, combined with market expectations of further price falls, can lead many countries, but also the EU itself, to a reduced replenishment of natural gas reserves today.

The truth is that the price of natural gas, although it is far from the record of 330 euros/MWh, is still double its historical average levels.

Thus, the scenario according to which prices could fall to the level of 10 euros/MWh -this estimate was presented for the first time in a Bloomberg report- leads both Europe and other consumers to delay the filling of storage of natural gas, betting on better prices in the near future.

But a look at how futures prices are shaping up in the TTF center shows us that this tactic could turn out to be quite a trap. In the table below, it is easy to see that natural gas contracts for immediate delivery are trading significantly lower than contracts for winter 2023-2024.

IEA response

The recent IEA report somewhat justifies the above discrepancies.

According to the report, warehouse replenishment conditions this summer may ease market fundamentals. But he cautions that the improved outlook is by no means a guarantee of avoiding future instability. Therefore, it is good to be optimistic, but we must also watch our “backs”, at least to some extent, to mitigate possible future risks.

What could these risks be?

First, the reversal of favorable conditions this year.

Natural gas consumption in the winter of 2022-2023 in the economically advanced countries of Europe fell by around 55 billion cubic meters year on year, the steepest drop in absolute terms of any winter period on record.

The extremely mild winter and the high LNG purchase rates that “allowed” the lag in China due to the reduction in consumption due to the Zero Covid policy, were the main culprits.

But despite the big drop in prices this year, according to the IEA, the global supply balance is subject to an unusually “wide range of uncertainties”:

  • The possibility of special climatic conditions, such as a particularly dry summer with weak winds or a radically different winter,
  • The lower availability of LNG due to a possible increase in demand from China as it abandons the Covid Zero policy and returns – although slowly for now – to full economic activity,
  • The possible further reduction in natural gas deliveries from Russia.

What the IEA is trying to say is that it is extremely difficult to reach a safe conclusion about the course of natural gas prices.

Given this admission, he is at least risk averse that supplies filling European warehouses proceed at an extremely slow pace amid the certainty that prices will continue to fall sharply.

All this will be discussed on May 25, when the European Commission Risk Group meets to present the scenarios prepared by the European Network of Transport System Operators -ENTSO-E-, which represents 39 transport system operators. electricity from 35 countries throughout Europe for the evolution of energy demand and especially natural gas in the coming months.

Reduced prices “roll up the carpet” to reduce supply

With a large part of Europe’s LNG supplies coming from the US, Baker Hughes data on Friday added further concerns about the future path of prices.

The US oil and gas rig count fell last week to a one-year low as natural gas rigs posted their biggest weekly decline since June 2020.

The market always translates a decrease in the number of rigs as lower production later on. That’s why US natural gas futures rallied more than 5% immediately after the Baker Hughes report was released.

In fact, the number of oil and gas rigs is an early indicator of future production. You see, falling gas prices have already prompted some exploration and production companies in Arkansas, Louisiana and Texas to announce plans to shut off gas rigs and reduce production.

For example, the number of rigs operating at Haynesville, the country’s third-largest shale gas field, dropped by five rigs last week. So Haynesville currently operates 57 rigs, the lowest number since February 2022, according to Baker Hughes.

The number of rigs at Eagle Ford in South Texas also fell, to the lowest level since May 2022.

If rig closures continue, US crude oil and natural gas production are unlikely to maintain their recent strong rates, or the rates so far forecast for 2023 and 2024.

We remind you that oil production of 11.9 million barrels/day in 2022 shot up to a new all-time high of 12.5 million barrels/day in 2023 and according to EIA forecasts it would reach 12.7 million barrels/day. barrels/day in 2024.

Meanwhile, US natural gas production was on track to increase from a record 98.13 bcfd in 2022 to 101.09 bcfd in 2023 and 101.24 in the EIA forecast in 2024.

It is understood that low natural gas prices may trigger a further significant decline in US drilling and thus a significant decline in previous figures.

But what happens when the supply of a good is significantly reduced?


This material is provided for informational purposes only. In no case should it be taken as an offer, advice or solicitation to buy or sell the mentioned products. Although the information contained is based on sources believed to be reliable, it is not guaranteed to be complete or accurate and should not be relied on as such.

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