European gas prices are soaring again, and supply tensions could continue into early 2023

On the first trading day of 2022, European natural gas futures prices stopped falling for eight consecutive years and recovered from their lows again.

Data from the Intercontinental Exchange (ICE) in the United States shows that in the European market on the 3rd, the price of dutch natural gas futures, which is known as the "wind vane" of European natural gas prices, rose by 20% at one point. As of press time, the price of this variety was quoted at 84.100 euros / MWh, up nearly 15% from December 31, 2021.

Chaos Tiancheng Futures analyst Dong Dandan said in an interview with the first financial reporter that the current factors affecting the price fluctuations of natural gas in Europe are mainly: on the supply side, the changes in the volume of gas transmission from natural gas pipelines in russia, and the changes in the supply of liquefied natural gas vessels from the United States; on the demand side, the impact of weather changes on the demand for natural gas in Europe. "At present, the change on the demand side will not be too large, and the supply side may dominate the future trend of natural gas prices." If the new demand is higher than the new supply, the european gas price as a whole will remain strong. She said.

Roller coaster

Declining gas flows from Russia through key routes in Ukraine have exacerbated uncertainty over Europe's winter gas supply. According to gas transmission operator Eustream, the size of Russian gas delivered through Ukraine to Slovakia fell to its lowest level in two months on Jan. 1, with a daily shipment of about 276 gigawatt hours (GWh).

In addition, demand from potential natural gas buyers in Asia is also increasing, leading to the return of LNG vessels to Asia, and the European region may once again face the risk of gas supply shortages.

According to the Chicago Stock Exchange (CME), the Japan-South Korea benchmark liquefied natural gas price (JKM) has reached $30.505/million BGH (about 90.26 euros/MWh). This means that in the future, U.S. LNG traders will make more profits from Asian buyers than European buyers.

On Christmas Eve last year, European gas prices broke through their peak again after the supply of yamal-Europe, one of Russia's main pipelines to Europe, fell to zero. After the U.S. LNG vessels rushed to Europe, the price of this variety fell sharply in the last few days of 2021, and its rise and fall was around 20%.

Dong Dandan believes that the first reason for this phenomenon is that the current European natural gas stocks are at a seasonal low level, and the region's natural gas consumption can only rely on its stocks and more liquefied natural gas, which makes European natural gas prices more sensitive to changes in the supply side and demand side.

According to the European Total Natural Gas Stocks (AGSI+), as of December 31, the total European gas stocks were about 628.1 MWh, a gap of more than 320 MWh from the five-year average of 957.1 MWh in 2016-2020.

Dong Dandan further explained that natural gas demand in Asia diverted natural gas sources from Europe in 2020, resulting in insufficient natural gas stockpiling in Europe in 2021.

CME data shows that in the heating season from October 2020 to March 2021, the pricing of JKM has increased significantly compared with the price of TTF. During this time, the average JKM price was $3 to $5/MMD higher than the average TTF price. According to market research firm Refinitort, driven by profits, European LNG imports fell by more than 10 million tons year-on-year during the above time period.

Dong Dandan also said that the current geopolitical relations between Russia and Europe are relatively tense, which has brought uncertainty to the European natural gas market, which in turn has caused greater volatility. Previously, the German federal government expelled 2 Russian diplomats. In response, the Russian Foreign Ministry declared two German diplomats "undesirable."

Supply is tight or continues until early 2023

According to ICE, European natural gas rose about 4.5 times throughout the year in 2021, making it one of the most growing varieties in the global commodity market. But it has put some pressure on the European economy, with rising energy prices fueling inflation in the region, forcing production cuts in industries such as aluminum, zinc and fertilizers, and triggering a wave of closures of electricity suppliers in many European countries.

After the retracement of natural gas prices, the European energy market has once again opened a linkage effect. Recently, data from the European Energy Exchange (EEX) showed that the price of electricity futures in Germany rose by 124.7 euros /MWh in the coming year. According to ICE, the price of European carbon emissions futures rose to 85.3 euros/ton.

Traders are generally betting on the trend of gas prices in the future that the tight supply of natural gas in Europe will continue until the beginning of 2023. According to ICE, the price of natural gas currently delivered in the summer of 2022 has exceeded 100 euros per MWh, setting a new price record for the period.

Dong Dandan also believes that although the pressure on European natural gas prices has declined after the United States LNG ships have aided Europe, the current tight supply of the European energy market has not eased.

35% of the European region's gas demand comes from Russia. The German federal government has halted the Nord Stream-2 project, which was scheduled to be ventilated at the end of last year. The German energy regulator also said a decision on the full certification of the project would not be made in the first half of 2022.

In addition to natural gas, other energy sources in Europe are also facing supply shortages. According to the European Wind Energy Association, wind power generation in many European countries will decline in 2021. At the same time, nuclear power is also facing the problem of weak supply. French media recently reported that France, as a nuclear power power country, has dropped its nuclear power generation from 420 MW/ h a decade ago to 345 to 365 MW / h in 2021, a ten-year low. At the same time, Germany is also shutting down three more nuclear power plants in 2021.

Qin Yan, chief power and carbon analyst at Refiniter, told first financial reporters that because the European energy crisis has not been effectively alleviated, both the European Commission and member states have relaxed their attitude towards nuclear energy and natural gas investment. At present, the two sides have initiated consultations on whether to put a green label on nuclear energy and natural gas, which is more likely to be adopted in the future. This means that in the future, many EU countries may increase investment in nuclear energy, which may alleviate the rising energy prices in europe to some extent.