Energy prices on both sides of the Atlantic have started the new year sharply lower as warm winter weather and concerns about the global economy weigh on the market.
The falls sharply contrast with early last year when Russia’s full-scale invasion of Ukraine in February triggered concerns about energy supplies, sending prices surging. European natural gas had been a particularly big focus after Russia cut off nearly all of its shipments to the region through pipelines.
Prices of Dutch TTF, the benchmark European gas contract, fell more than 10 per cent on Wednesday to €64.20 per megawatt hour, the lowest level since November 2021. It reached a high of more than €340/MWh last August.
The gas sell-off came amid a wider downturn in energy markets, with Brent, the international crude oil benchmark, dropping 5.2 per cent to settle at $77.84 a barrel amid fears of a global economic slowdown and weak oil demand in China. US oil prices fell by a similar amount to settle at $72.84.
The TTF drop in recent days suggests the market “is confident that should another cold snap materialise over the coming few months, there is enough gas in storage and flows in liquefied natural gas to get us through this winter”, said Tom Marzec-Manser, lead European gas analyst at ICIS. “The concern that we may have had back in August that Europe is going to end winter with extremely low gas storage is starting to dissipate,” he added.
Falling TTF prices come as economic reports have shown consumer price inflation began to ease in major European countries including Germany and France at the end of last year.
US gas prices, which have remained far cheaper than those in Europe thanks to soaring shale gas supply in the past year, have also slumped in recent days as a brutal deep freeze across the country gave way to warmer than expected weather, hitting heating demand.
Henry Hub, the US benchmark, has traded around $4 per million British thermal units (€13/MWh) this week, near its lowest price in almost a year, and 40 per cent cheaper than its level in mid-December. It partially rebounded on Wednesday after dropping 11 per cent on Tuesday.
The slow restart of Freeport LNG, a huge export facility on the Gulf of Mexico, has also removed a big consumer of gas from the market, providing another headwind for US prices. The company last month again delayed the restart of the plant, damaged in a fire last summer, until “the second half of January”.
American LNG exports increased last year as European buyers rushed to replace Russian fuel with supplies from the US, helping to drive Henry Hub prices to a 14-year high of almost $10/mn Btu in August. But shipments are close to maximum now and no new plants are set to start producing this year.
Moscow’s weaponisation of gas over the summer led the EU to implement measures including mandatory gas storage and consumption reduction targets that helped Europe to fill its gas storage facilities to more than 95 per cent of capacity by mid-November.
While December historically has been a month where European gas storage levels decline because of higher heating demand, this year, since Christmas Eve, Europe has mostly been sending more gas into its storage facilities.
Storage facilities stood at 83.37 per cent full at the end of December, according to industry body Gas Infrastructure Europe, some 30 per cent higher than in 2021 and more than 10 per cent higher than the average of the previous five years.
If Europe continues to import record levels of LNG and gas demand remains subdued, finishing this winter with storage levels above 35 per cent capacity, a five-year average between 2016 to 2020 “looks plausible”, Marzec-Manser of ICIS said.
But while a full-blown European gas crisis is likely to have been averted for this winter, market participants are still concerned about the winter of 2023, with TTF gas future prices for the fourth quarter of this year and the first quarter of 2024 sitting more than €10 higher than current prices.
Traders are concerned Europe will struggle to access the same amount of LNG, which is shipped by sea on huge tankers, as China’s economy reopens following the end of its zero-Covid policies, with seaborne cargoes the main substitute for the Russian supplies that once met as much as 40 per cent of EU demand.
“There are a great many unknowns which could significantly alter Europe’s supply-demand balance,” said Natasha Fielding, head of European gas pricing at Argus Media.