Natural Gas Prices Tumbling, but Don't Ignore Risk

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--A mild winter and a reshuffling of global flows means the price for natural gas in the European market will remain far below historical peaks, analysis finds.

Consultant group Wood Mackenzie expects gas prices in the European market to dip below $10 per million British thermal units this summer. That would be about 15% lower than current market levels for the Dutch Title Transfer Facility (TTF), the European benchmark for the price of natural gas.

With a mild winter heating season across much of the Northern Hemisphere, TTF prices are already down more than 15% since the start of the year. In terms of demand, Wood Mackenzie sees trends at about 16% below the five-year average because of mild weather and a regional power sector leaning more on renewable resources.

On the supply side, the consultancy said flows are strong enough to push European gas storage levels to close to 90% of their peak capacity by July, adding further support to the bearish outlook for market prices.

"With storage levels nearing full capacity towards the end of the summer, there will be up to 10 billion cubic meters of excess supply that will need to either be piped into underground storage facilities in Ukraine or floated in LNG (liquified natural gas) vessels," said Mauro Chavez, the director of Europe gas and LNG markets at Wood Mackenzie.

Gas storage and price movements are in stark contrast to 2022, when the Russian military assault on Ukraine began. The war premium on prices, however, was preceded by what the European government described as a "prolonged period" of price volatility that was the result of lower-than-usual gas storage levels.

Apart from mild weather, markets have adjusted to supply-side concerns stemming from the war in Ukraine. Before the war, Russia was a main supplier of crude oil and natural gas to the European economies, though Western sanctions have since limited what's available from the country.

It's largely been LNG that's filling the void. Wood Mackenzie data show Russian gas supplies down more than 80% from pre-war levels, while LNG deliveries are up around 60% from before the war.

It's largely been LNG supplies from the United States that's filling the gap. The latest short-term market report from the U.S. Energy Information Administration (EIA), the U.S. Energy Department's data cruncher, show U.S. LNG exports increasing by 3.3% from 2023 levels to reach 12.34 billion cubic feet per day (Bcf/d) in 2024. That level expands by another 17% to hit 14.43 Bcf/d, even with a pause on new permitting for LNG projects in the United States.

Over-reliance on a handful of suppliers, however, is risky. Economies of scale will still need fossil fuels for the foreseeable future and, as with the case of Russia, too much dependency can be detrimental.

In the United States, a leading oil and gas producer, winter storms can throttle supplies and influence domestic demand, while international issues such as rebel attacks in the Red Sea can easily disrupt global trade patterns. And after a string of Ukrainian drone attacks on Russian oil refineries, RBC Capital Markets said market stability remains under a lingering degree of threat.

"The increasing tempo of attacks brings Russia's refined product flows further into question, given Moscow's recent announcements to taper refined export cuts broadly through June as well as a six-month ban on gasoline exports," Helima Croft, RBC's head of global commodity strategy, said.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).