As Europe prepares for the winter heating season, a sense of calm permeates its natural gas markets and governments. In stark contrast to the anxiety of the previous year, this tranquility is attributed to full gas storage sites and the uninterrupted flow of liquefied natural gas (LNG) supplies, bolstered by the opening of new import terminals.
Gas trading in the region appears to be on stronger ground, with governments and forecasters urging caution despite the positive outlook. However, this respite may be short-lived as Europe struggles to realize that its natural gas prices are no longer determined exclusively within its borders. The vagaries of markets in far-flung places such as Australia, Japan, China and the United States now exert significant influence, ushering in an era of unpredictability and volatility.
The global nexus: changing determinants of gas prices
The traditional narrative that Europe primarily determines gas prices is undergoing a transformation. While securing LNG supplies may not pose immediate challenges, commercial gas prices will increasingly be influenced by global factors. The shift to LNG, necessitated by the loss of Russian pipeline gas supplies, exposes Europe to the ebb and flow of the international supply and demand landscape.
Whether it’s a disruption at an Australian LNG export terminal, an incident at a US export facility or a surge in demand in Asia, these events now directly impact natural gas benchmark price fluctuations in Europe. The past two months have provided a glimpse into this interconnected reality as the continent becomes more vulnerable to external shocks.
Navigating the currents: the LNG landscape in Europe
In November there was an increase in LNG demand in Europe and Asia, coinciding with stability in spot prices in the latter. However, behind this apparent balance lies a nuanced scenario. Demand from end users in Northeast Asia has remained subdued, with high terminal inventories in South Korea and Japan acting as a brake, according to Samuel Good, head of LNG pricing at Argus.
In contrast, European natural gas benchmark prices have seen fluctuations as traders grapple with the interplay of higher heating demand and nearly full EU inventories. The continent’s gas storage sites, which recorded an impressive 98.69% capacity as of November 21, have witnessed consecutive small net withdrawals in recent weeks. This deviation from the trend observed since April indicates a change in usual seasonal patterns.
Record inventories: a double-edged sword
Europe’s gas storage sites have reached unprecedented levels, with early November figures at a staggering 99.6% of capacity. This surplus, well above the ten-year average of 89%, offers a sense of security. However, the other side of the coin reveals potential vulnerabilities. Analysts, including Reuters’ Kemp, estimate that considering changes in storage trends over the past decade, European gas sites could run out at between 35% and 52% of their capacity this winter, depending on the severity of the winter. .
Ole Hansen, head of commodities strategy at Saxo Bank, points to a three-year high in gas supplies to Europe from Norway, along with abundant offshore LNG volumes. Despite this, the premium of the February winter contract over spot prices has been reduced to just $1.64 (€1.50) per megawatt-hour. The optimism stemming from record inventory levels is met with a note of caution: Calm in the market could quickly turn to turbulence if new supply concerns arise or if this winter turns out to be unusually cold.
Veil of Winter: Uncertainty and the Road Ahead
As Europe moves into the winter months, uncertainty is in the air. Milder-than-usual temperatures last year provided some respite, allowing Europe to meet the challenges of importing larger volumes of LNG amid escalating prices. However, the course of this winter remains unpredictable, with weather emerging as the main player in the LNG market and pricing narrative.
The changing dynamics of the LNG market, now a truly global product, exposes Europe to supply disruptions as far away as Australia. The senior energy analyst for the European team at the Institute for Energy Economics and Financial Analysis (IEEFA) emphasizes the growing volatility in gas and LNG prices, driven by global factors. The future, he says, is shrouded in uncertainty, making it difficult to predict how the delicate balance between supply and demand will play out and what impact it might have on prices.
While Europe currently enjoys the benefits of full gas storage and a steady flow of LNG, the winds of change are blowing. The continent must recognize that the days of isolated gas trading are behind us, ushering in an era in which global events intricately shape the trajectory of natural gas prices. As gas trade becomes an international symphony, Europe’s ability to overcome volatility will determine its energy resilience in the years to come.
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