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Europe’s Gas Supply Situation: Despite Geopolitical Tensions, the Market Remains Stable

ENERGYEurope's Gas Supply Situation: Despite Geopolitical Tensions, the Market Remains Stable

The multitude of recent geopolitical events around the world linked to the natural gas market should raise similar concerns as in 2022, when Europe feared that without Russian resources, we could simply freeze over. However, time has shown that the commodities market adapted relatively quickly to the current global situation. Does the conflict involving Israel, the Houthi militias and the ongoing war between Russia and Ukraine affect what is happening in the gas market, especially in Europe? What about the American market, which suffered a record cold winter recently?

Europe has Highly Diversified Supplies

The conflict between Israel and Hamas had a marginal impact on the actual flow of gas worldwide, despite Israel being a significant producer of this resource. At one point, the idea of constructing a marine gas pipeline to Southern European countries was debated. However, this conflict fueled Houthi militias’ attacks on merchant ships crossing the Red Sea to the Suez Canal. This escalation in attacks led to many carriers diversifying their supply route. A large proportion of oil and gas now travel around Africa, significantly increasing delivery times and costs. It worth noting that prior to the conflict, about 8% of all LNG trade used this region’s route.

However, does this have a significant impact on the fundamental situation of the European gas market? Not necessarily. It must be remembered that the United States currently provides around 50% of Europe’s LNG supply, and this share is likely to increase in the latter half of 2024 due to the commissioning of new export capabilities in this country. Secondly, Europe still uses gas pipeline deliveries, predominantly from Norway, but also from countries such as Algeria and Azerbaijan. The role of Russia has been marginalized, though Russian gas still reaches many European economies. Thirdly, the gas destined for Europe via the Suez Canal will ultimately reach its final destination—albeit slightly later and more expensively.

Europe has Enough Gas to Cover the Winter Season

The autumn and the beginning of this winter have been quite mild for Europe. Consequently, the start of the heating season occurred much later than usual, which could be associated with climate change. Nevertheless, after a tough 2021 and 2022, Europe has not only significantly diversified its gas supplies but also initiated their building for the heating season earlier. At this point, the current storage fill rate in Europe stands at 72%, while the five-year average for this period is 62%. It is highly likely that at the end of the heating season, the storage fill rate will exceed 50%, indicating Europe’s partial preparedness for the incoming season. This situation is well illustrated by the forward price curve in the gas market. TTF gas deliveries to Dutch ports are expected to stay mostly unchanged until the beginning of autumn this year, and forward prices are marginally higher for the next winter season. Although prices are slightly higher than before the period of turbulence related to the pandemic, the war in Ukraine, and inflation, it doesn’t seem that in the present circumstances we can consider any possibility of a return to prices in the order of 100, 200, or even 300 EUR per MWh.

Of course, in the case of a harsh winter and lesser opportunities to import gas from the United States, prices would probably be higher, and concerns about the availability of resources would be considerably greater. However, global forecasts for the gas market suggest that the market will remain balanced, even with increased demand from China.

Gas in the USA will Remain Cheap

Natural gas plays a significant role in the European economy, as a considerable part of the industry relies on gas. Gas is equally important for the United States, where over 40% of power plant capacity relies on this resource. However, the United States has the luxury of having sufficient amounts of gas not only for its consumption but also for export. Production increases year on year, despite declining investments and the current administration’s reticence towards shale. The current surplus in the gas market is considerable, and gas stock amounts are around 10% higher than the average for this period and 13% higher than last year. What’s more, it is anticipated that stock levels at the end of the heating season will be 20-25% higher than average, which could theoretically be the most significant surplus ever. So, is there still a chance for pricier gas in the USA?

Gas prices in the USA at Henry Hub are considerably lower than in Europe, but the disparity within the US can be immensely variable depending on the time of year. A sudden cold snap can lead to several hundred percent price increases in immediate deliveries, though this is not reflected in the prices of forward contracts. Due to the current overproduction compared to demand, gas prices will remain low. It is not cost-effective to slow down production, as the costs of halting extraction are typically too excessive. That’s why it’s better to extract and store this gas for potentially challenging times ahead.

What’s Next for Prices in Europe and the USA?

Nevertheless, the disparity between American and European gas is likely to decrease. New export capacities in the US will increase exports, stifling prices in Europe and Asia to even lower levels. Currently, gas prices in Europe are below 30 EUR/MWh and are expected to stay at such levels until the beginning of autumn. Theoretically, the market foresees an increase for the winter season to 35 EUR/MWh, but there will be a high influx of gas into Europe in the second half of the year, so it cannot be ruled out that prices may fall below 20 EUR/MWh. Of course, further geopolitical tensions in the world may change this direction, but looking at the pure fundamentals and global trade, the direction appears to be downward. For the United States, it appears that prices might hit a particularly low trough even in the range of 1.5-2.0 USD/MMBTU, just before rebounding in the summer season and then the autumn-winter season. Investors should note that much of the increases expected to occur in the second half of the year will be a result of its forward price structure and carryovers. Gas is an essential resource for almost every economy in the world, but it seems that after recent challenging years, it’s time for stabilization. The changes made in recent times have led to a place where even significant disturbances do not lead to large price fluctuations.

Author: Michał Stajniak, Deputy Director of Analysis Department, XTB

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