By Alexander Miller, consultant in energy markets. Eurasia Business news, October 24, 2022

Gas prices in Europe continue to fall for the fourth week in a row. Unusually warm weather delays the start of pumping gas from underground storage facilities, where reserves have reached almost a 94% level. These circumstances mitigate concerns about gas shortages in the heating season for Europe.

Energy analysts now believe that the supply of LNG in Europe may decrease due to the fact that Asian traders will return to buying fuel for their markets, and the factor of colder weather is already included in gas prices under longer-term contracts, which will affect the spot market in winter.

Gas TTF futures fell below €100 per 1 MWh for the first time since June. During October 24, the price of November futures fell by 15%, to € 96.5 per 1 MWh, or about $ 990 per 1 thousand cubic meters, the spot price of TTF for a day ahead was € 29.5 per 1 MWh, or about $ 310 per 1 thousand cubic meters.

The main reasons of falling prices are the unusually warm weather established in Europe, as well as high gas reserves in underground storage facilities (UGS). They reduce fears of gas shortages in winter and allow to extend injection into UGS facilities. Usually, gas from them begins to be taken after the twentieth of October.

In the UK and Northwest Europe this month the air temperature will be significantly higher than the seasonal norm, warm weather is expected in early November. According to AGSI+, the OCG filling rate is 93.43% on average in Europe, or about 100 billion cubic meters. In the UK, UGS facilities are fully filled, in France – by 99.51%, in Denmark – by 99.74%, in Germany – by 97%, and in the Netherlands – by 92.5%.

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Another reason is that large gas consumers, such as Germany and the United Kingdom, have notably reduced their dependence on Russian gas. In addition, the European Commission encourages Member States to limit their energy consumption, which rebalances the balance between supply and demand a little.

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 a shortage in winter and power outages. The EU countries are working on the possibility of introducing a temporary “dynamic price corridor” at the TTF hub, limiting gas prices in electricity production and mandatory joint gas purchases. Discussion of these measures will continue this week.

Gas prices are traditionally difficult to predict due to the weather factor. In addition, large-scale shipments of LNG continue to go to Europe. The reserves in the tanks of the receiving terminals are filled to the maximum level, their capacity is about 61%. Off the coasts of Spain, Portugal and the UK, dozens of ships are waiting for their turn to unload LNG. Moreover, the recently opened Eemshaven LNG terminal boosts Europe’s ability to import cargo from other continents.

But Asian buyers are also beginning to prepare for the winter. They plan to purchase additional batches of LNG in the coming months. We should expect that Asian importers, who simultaneously act as traders, will take more gas. The bulk of this gas is purchased with a price reference 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.

In the period of reduced demand from the heating side, he specifies, part of the volumes is directed to resale, but in the heating season they “will be needed at home.”

An increase in gas demand, for example, amid a cold snap in Europe, is likely to return gas prices to their previous values, which is confirmed by forward curves: contracts for the supply of gas to the European market in December, for example, are already estimated at almost $ 1,500 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 weather changes and demand growth, gas prices in the European market are likely to stay above $ 2,000 per 1 thousand cubic meters with the possibility of even more serious spikes on some days this winter.

On August 25 the spot price of gas in Europe had crossed $ 3,300 per 1 thousand cubic meters. Prices are growing by more than 10%, according to data from the London stock exchange ICE Futures. At the moment, the cost of the September futures on TTF on the exchange reached $ 3,312 per 1 thousand cubic meters. This is the maximum level since March 7, when a historical gas price of $ 3,898 per 1 thousand cubic meters was recorded. In early October last year, gas prices crossed $ 1,000 per 1 thousand cubic meters, a record since March 2018.

In early October the U.S. bank Morgan Stanley significantly rose its forecasts for liquefied natural gas prices for the next two years amid an expected surge in demand for this type of fuel in Europe, Bloomberg reports.

The U.S. bank estimates that LNG in the spot market in Asia will cost an average of $39.5 per 1 million British thermal units (BTUs) in 2023 and $34.5 in 2024. The forecast for next year has been raised by almost a third, for 2024 – by 57%. Demand for liquefied natural gas (LNG) is expected to rise by 25 to 50% by 2030, according to Morgan Stanley.

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