TTF gas is trading 80% below its recent highs, while US Natgas plunged nearly 75%
Just a few months ago, the media suggested buying warm sweaters for the coming winter because of the extreme prices of energy and gas. A winter with a gas price of 300 euros per megawatt hour would not be cheap and most likely warm. However, these fears have long passed and now we ask ourselves, is this the end of the era of extremely expensive gas and high energy bills? On the other hand, is this the beginning of bigger problems facing Europe and other gas-dependent countries?
Historically high gas prices are behind us
At some point, gas prices on European markets jumped to 300 EUR/MWh, which was 10 times higher than before the pandemic or even 30 times higher compared to the Covid low. Prices skyrocketed mainly due to war in Ukraine, although not sufficient diversification of energy sources in Europe and dependence on transfers from Russia also contributed to this. The situation was made even worse by low inventories after the previous winter. With the help of the Nord Stream transmission system, Russia wanted to make Europe even more dependent on its supplies, cutting off other export routes. At this point, it should also be noted that Europe itself has been limiting its own production for many years and has not diversified supplies, with the exception of a few countries.
Expensive gas threatened Europe's economy
High gas prices have wreaked havoc on the European economy, which has not collapsed only thanks to earlier momentum and government financial support. Of course, all this turmoil affected inflation, which jumped to levels not seen in decades. Trading conditions in EU countries were the worst ever, leading the popular Eurodollar to fall below parity! European indices didn't do well either, and the farther east you go, the worse it gets. Indexes were at their lowest since the pandemic, DAX fell 25% from its high, while Polish WIG20 lost nearly 50%.
Europe has withstood the test
Almost a year has passed since the beginning of Russia's invasion of Ukraine, and since then the policy regarding the gas giant or the energy mix itself has changed significantly. The European Union, the United States and the G7 imposed a number of restrictions on Russia and at the same time ditched commodities imports from this country. Of course, Europe had to find other suppliers, although in the early stages of the conflict some countries hoped that business with Russia would resume. Ultimately Russia forced Europe to buy gas from various places, which led to a massive increase of LNG imports, which are purchased not only on the spot market, but also via the long-term contracts, which is accompanied by infrastructure development.
The weather is favorable
We haven't observed such mild weather during the heating period in recent years. High temperatures and the earlier destruction of demand by the manufacturing sector reduced consumption by an average of 15-20%. Europe has long tried to move away from emission-intensive energy sources, and gas was supposed to be only a transitional fuel, and now it seems that this process will accelerate significantly. On the other hand, the weather can be capricious, which is why Europe should not forget about the diversification issues and not rely only on green energy, but also look towards fossil or nuclear sources in order to ensure stability and security.
Is Europe safe?
Gas storage facilities were 90% full before winter, even as one of the main export terminals in the US was shut. Last year, markets faced several bizarre situations such as filling warehouses at the end of the year or negative prices for same-day deliveries due to the lack of storage. However, it is worth remembering that it is highly unlikely that such events will reoccur this year.
Currently, the warehouses are 70% full and at the end of the heating period inventories should be over 50% full. Theoretically, Europe should be safe, but the weather and relatively low consumption in the manufacturing sector are responsible for the current state of affairs. If we add the current supplies to the broad picture, we will notice that they are lower than a year ago, when Russian gas was still flowing to Europe. This means that Europe has to compete in the spot market, as long-term contracts will not come into force for several years. The spot market itself is very tight, Europe has to grab most of the gas from this market, and we have to compete with Japan, Korea or China, where prices are currently slightly higher. This means that the price bottom on the European gas market, around EUR 50/MWh, has probably already been reached. The futures market no longer forecasts further declines and deliveries for the next winter season are even EUR 20/MWh higher.
Europe has to compete with Asia on the spot market, therefore TTF gas prices must return above Asian benchmarks, in particular JKM gas. Source: Bloomberg, XTB
How can US gas be affected?
The price of US gas in 2022 jumped to levels not seen since 2008! However, the fundamentals have changed drastically since then. The US is now one of the largest producers and exporters in the world. Massive shale production caused prices to drop well below global benchmarks. The weather and high production may currently favor price stabilization, similar to the 2015-2020 period. On the other hand, even despite low gas prices, the implied volatility was several times higher compared to other popular commodity markets, such as oil or gold.
Is this the end of downward move?
European gas has most likely reached price bottom. Prices are still at their lowest since mid-2021, so the impact on the euro or European indices should still be positive. In turn, US gas is already extremely cheap. Recent downward correction pushed NATGAS price nearly 75% below the 2022 high and only once in the past a bigger sell-off was recorded! Now we see that speculative players are increasing their involvement in the market quite strongly, despite high production and favorable weather, which may suggest some changes in the market. In the near future, one of the largest LNG export terminals-Freeport, will also resume operations. Meanwhile, the huge price difference between US and European gas, taking into account the cost of liquefaction and transport, should encourage overseas companies to increase gas exports to the Old Continent. This may mean that we have already reached seasonal low.
