Natural gas prices in Europe has dropped by about 60% since late August when it hit its all-time high. The aggressive stocking of the region’s storage facilities ahead of the winter season is largely behind the decline in prices.
As at the time of writing, the benchmark Dutch TTF futures were down by 6.94% at 138.89 euros per megawatt hour. The start of the winter season in the Northern hemisphere will show just how prepared Europe is in dealing with its persistent energy crisis.
Fundamentals
Supply outlook
In recent months, weather patterns have been a major driver of natural gas prices in Europe. In fact, concerns over a significant supply/demand imbalance during the winter season helped bulls remain in control of the market.
In fact, supply concerns were largely behind the rallying to its record high in late August. As is the case in a typical market, high prices attracted more supplies. Besides, the continent was keen on dealing with the energy crisis ahead of the high demand season.
With the subsequent refilling of inventories, natural gas prices in the region have dropped by about 60% since then. Granted, the benchmark Dutch TTF futures are still trading above the psychologically crucial zone of 100 euros per megawatt hour (MWh).
Since early June, the aforementioned level has been a steady support for natural gas prices. However, it had momentarily dropped below this level in early November amid the surge in LNG imports.
Notably, flows of the product into northwest Europe hit its all-time high in December. While the continent’s gas storage levels have dropped from 96% in mid-November, they remain over 90% full as seen in recent data from Gas Infrastructure Europe.
Demand outlook
Even with the surge in supplies, traders are keen on how natural gas prices will react to the rise in demand over the upcoming winter period. Based on the released forecasts, temperatures in various parts of the continent are expected to drop below the freezing point in coming days.
Indeed, this will be the first major test of how effective the region is dealing with its energy crisis following the curbing of the significant Russian supplies. This comes at a time when nuclear power outages in France and Sweden risk straining gas supplies.
It will also be interesting to watch how the easing of COVID-19 restrictions in China will impact natural gas prices in Europe. The reopening of the Chinese economy, coupled with winter in the Asian continent, would mean heightened competition for LNG.
