Natural gas prices in Europe have been volatile during the spring due to colder weather and lower supplies from Norway. But as we now enter summer, the EU is already preparing for next winter.
On the Dutch TTF market, natural gas futures for the first month are trading at around €31 per megawatt hour (May 8), which is the same level as three years ago and almost half of the €54/MWh reached on October 8 last year, the day after Hamas’s attack on Israel which triggered a massive military counter-offensive.
“Natural gas prices in Europe experienced a lot of volatility in April,” Warren Patterson, head of commodity strategy at ING, said in an analysis published on May 7.
“The one-month term on TTF rose from just over 25 euros/MWh in early April to almost 34 euros/MWh in the middle of the month, before falling below 30 euros/MWh at the end of the month. However, prices rose again in early May. Reduced Norwegian gas flows to Europe and a late cold snap across large parts of the continent increased heating demand in the second half of April.”
According to Patterson, however, this volatility will be temporary: “Europe will reach 100% storage before the start of the next heating season.”
“This should keep downward pressure on prices and we expect TTF to average €25/MWh for the remainder of the pre-winter season.”
The table below shows the differences between the countries in terms of gas storage.
EU less dependent on Russia Energy
After the Russian invasion of Ukraine, the EU managed to abandon the import of Russian gas. After the painful increases in energy prices in 2022, we have seen a steady decline, thanks to a combination of mild weather and reduced demand. At the same time, LNG (liquefied natural gas) imports and the infrastructure to support them are growing rapidly.
According to information from Bruegela Brussels-based political-economic think tank, the EU has cut Russian fossil fuel imports from a maximum of $16 billion per month in early 2022 to around $1 billion per month by the end of 2023.
Although Russia no longer has the extraordinarily high export earnings it had in early 2022, fossil fuel export earnings are still comparable to 2019, mainly because the country has shifted oil and gas exports to China, India and Turkey. To compensate for the reduced Russian imports, Europe has increased imports from other countries.
Europe needs more LNG
Globally, demand for LNG is at a record high. At the same time that Europe is importing more and more LNG, it is also competing with China for the raw material.
Europe’s LNG imports doubled from 20 percent in 2019 to 40 percent in 2023, thanks mainly to a fivefold increase in imports from the United States. Imports of Russian LNG also increased, but in absolute terms this increase corresponded to less than 10% of the gas transited through the Nord Stream pipeline when it was in operation.
According to Energy Outlook Advisors (EOA) ship tracking data shows that global demand for LNG reached a record high in 2023, at 401 million tonnes (mt), up from 390 mt in 2022, which itself was already a record year. This demand comes against the background of limited additions of new capacity and lower spot prices compared to 2022.
This increased demand for LNG has left European countries vulnerable to market volatility, especially as 70% of these imports are purchased on short-term contracts. Last year, the exceptionally mild winter weather led to reduced demand for heating in both Europe and Asia. In addition to the mild weather, the economic slowdown in China between 2022 and the first part of 2023 led to a decrease in Beijing’s LNG imports, but this may be about to change.
The Chinese economy is moving again
Driven by Chinese demand, Asia remained the top destination for seaborne LNG cargoes in 2023, receiving more than 258 tonnes or 64% of global demand. According to EOA data, China overtook Japan as the world’s largest LNG importer last year, with imports rising 13.7%, after Chinese gas demand in 2022 was affected by a weak industry due to covid control measures and high spot LNG prices as a result of unprecedented demand in Europe.
Now, however, the Chinese economy is showing signs of awakening: in the first quarter of 2024, GDP increased by +5.3% year-on-year, which was above market expectations and even higher than the already ambitious target that the government in Beijing had set for itself (which predicted growth of around +5%).
According to estimates by China’s state-controlled Economics and Technology Research Institute (ETRI), total Chinese imports of natural gas, both via pipelines and liquefied via ships, reached a record high in the first quarter of 33 tonnes. In March alone, imports increased by 21% compared to the same period last year. Meanwhile, according to ETRI, China is expected to add a record new LNG receiving capacity of 60 mt per year in 2024, bringing the country’s total LNG receiving capacity to 176 mt per year, an increase of 52% compared to 2023.
According to the US Energy Information Administration (EIA) is “the growing LNG consumption in Asia is an important uncertainty factor with potentially large implications for global markets”.
“The lack of long-term contracts in Europe increases supply risk during cold weather and price peaks and may also intensify competition for spot LNG between regions”. Not least because, as EIA’s analysts point out, the global LNG markets will see modest supply increases in the coming years.
Prices are likely to remain volatile
So there are plenty of unknown factors. “Gas prices in Europe are likely to remain volatile for some time as the EU has to compete with the more price-sensitive China and to a lesser extent with India and Thailand for LNG cargoes,” said Stephen Ellis, utilities strategist at Morningstar.
“This dynamic brings greater price unpredictability, as the reliability of LNG cargoes cannot be guaranteed in the very short term at the most optimal price.”
However, the market is currently not expecting any huge spikes in the coming months. On the TTF, natural gas futures due in December 2024 are trading at €37.5/MWh (about 20% above current levels), while those for January and February 2025 are trading at around €37.9/MWh.
“As storage facilities in the EU and US are very full, gas prices are likely to remain extremely low in 2024, before recovering in 2025 as renewed demand for LNG kicks in,” adds Ellis.
In this context, Morningstar’s analysts believe that the best opportunities are represented by companies that take advantage of the demand for gas at discounted prices, such as Kinder Morgan (KMI) and TC Energy (TRP), which will benefit from increased demand and supply of LNG feedstock.
The table above also shows which exchange-traded commodity funds have exposure to natural gas.