The gas price trap

The gas price trap

The pressures on the European and global natural gas market have diminished since the beginning of 2023, mainly due to favorable weather conditions which have translated into a drop in demand.

The mild winter combined with the early mobilization of the EU to replace supplies from Russia with high purchase rates of LNG, our got us out of winter with half full european gas tanks – well above the five-year average of around 33% – and market prices around ten times lower than last year’s record highs.

Thus, entering the supply period next winter with warehouses 50% to 55% full – we remind you that these supplies will also be made through the common market platform for natural gas – the EU will actually need a much smaller amount of natural gas supplies.

This “comfort” combined with the fact that natural gas closed at the TTF hub on Friday at 32.7 euros per megawatt hour, gives Europe another “air” compared to the shock suffered in 2022, when Russia reduced flows of natural gas to Geria Epirus by approximately 80%.

This “air” combined with market expectations for further price cuts may lead many countries, but also the EU itself, to a reduced replenishment of natural gas reserves at present.

The truth is that the price of natural gas, although far from the record of 330 euros/MWh, is still double its historical average levels.

Thus, the scenario that prices could fall to the level of 10 euros/MWh – this estimate was first presented in a report by Bloomberg – leads both Europe and other consumers to delay the filling of storage of natural gas, betting on better prices in the near future.

But a look at the evolution of futures prices on the TTF hub shows us that this tactic could turn out to be a big trap. In the table below, it is easy to see that natural gas contracts for immediate delivery are trading significantly lower than contracts for the winter of 2023-2024.

The IEA’s response

The recent IEA report provides some justification for the above discrepancies.

Warehouse restocking conditions this summer could loosen market fundamentals, according to the report. But he warns that the improving outlook is by no means a guarantee of avoiding future instability. Therefore, it is good to be optimistic, but we also need to watch our “behinds”, at least to some extent, in order to mitigate possible future risks.

What could these risks be?

First, the reversal of this year’s favorable conditions.

Natural gas consumption during the winter of 2022-2023 in economically advanced European countries fell by about 55 billion cubic meters year-on-year, the largest decline in absolute terms of any winter period on record.

The extremely mild winter and the high LNG purchase rates that “allowed” China’s gap due to reduced consumption due to the Zero Covid policy, were the main culprits.

But despite the sharp decline in prices this year, according to the IEA, the global supply balance is subject to an “unusually wide range of uncertainties”:

  • The possibility of particular climatic conditions, such as a particularly dry summer with weak wind conditions or a radically different winter,
  • Lower availability of LNG due to a possible increase in demand from China as it abandons the Zero Covid policy and returns – albeit slowly for now – to full economic activity,
  • The possible further reduction of natural gas deliveries from Russia.

What the IEA is trying to say is that it is extremely difficult to draw a firm conclusion regarding the evolution of natural gas prices.

Given this admission, it is at least prudent that supplies filling European warehouses are proceeding at an extremely slow pace, in the certainty that prices will continue their steep decline.

All of this will be discussed on May 25, when the European Commission’s Risk Group will meet to present the scenarios prepared by the European Network of Transmission System Operators -ENTSO-E – which represents 39 electricity transmission system operators. from 35 countries across Europe for the evolution of energy demand and in particular natural gas in the coming months.

Reduced prices “roll the carpet” to reduce supply

Given that much of Europe’s LNG supply comes from the United States, data from Baker Hughes released on Friday added fresh concerns about future price developments.

The number of oil and gas rigs in the United States fell last week to its lowest level in a year, with natural gas rigs posting their biggest weekly drop since June 2020.

The market always translates a lower rig count into lower production afterwards. This is why U.S. natural gas futures jumped more than 5% immediately after the release of the Baker Hughes report.

Indeed, the number of oil and gas platforms is an early indicator of future production. You see, falling gas prices have already led some exploration and production companies in Arkansas, Louisiana and Texas to announce their intention to shut down gas rigs and reduce production.

For example, the number of rigs operating in Haynesville, the nation’s third-largest shale gas field, fell by five rigs last week. So Haynesville currently operates 57 rigs, the lowest number since February 2022, according to Baker Hughes.

The number of rigs in the Eagle Ford in South Texas also fell, to the lowest level since May 2022.

If rig shutdowns continue, U.S. crude and natural gas production is unlikely to maintain its recent high rates, or the rates projected so far for 2023 and 2024.

We remind you that oil production of 11.9 million barrels/day in 2022 reached a new record of 12.5 million barrels/day in 2023 and according to EIA forecasts it would reach 12.7 million barrels/day in 2024.

U.S. natural gas production, meanwhile, was on track to drop from a record high of 98.13 bcfd in 2022 to 101.09 bcfd in 2023 and 101.24 in the EIA forecast in 2024.

It is understood that low natural gas prices could trigger a further significant drop in US drilling and therefore a significant drop in the above numbers.

But what happens when a property is drastically reduced in supply?


This material is provided for informational purposes only. Under no circumstances should it be considered an offer, advice or solicitation to buy or sell the products mentioned. Although the information contained is based on sources believed to be reliable, no assurance is given as to its completeness or accuracy and should not be relied upon as such.

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