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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Does The EU Still Need To Repress Natural Gas Demand?

  • In late March the EU agreed to extend its voluntary natural gas demand reduction target for a year in order to protect itself against Russian attempts to weaponize energy.
  • According to Standard Chartered, these reduction targets no longer make market sense and risk more distortions in natural gas markets.
  • As of March 2023, EU natural gas inventories were more than double the year-ago levels, and prices in both Europe and the U.S. have been declining.

Back in late March, the EU Council reached an agreement to extend voluntary 15% gas demand reduction targets because “The EU is not completely out of the energy crisis and Russia continues to use energy as a weapon.” 

The new regulation covers the year to 31 March 2024 and sets a 15% demand reduction target relative to the 1 April 2017 to 31 March 2021 average. The council revealed that overall EU consumption of natural gas had dropped by 19.3% between August 2022 and January 2023, and noted that reducing the bloc’s gas demand had allowed it to fill its storage, keep prices down, and secure more energy supplies.

The EU appears partly justified in its actions considering that Putin has continued to weaponize its energy commodities. Last month, Gazprom, Russia’s state-owned gas supplier, warned Europe there “is no guarantee that nature will make such a gift” in reference to the mild weather the continent has experienced in winter.

But a closer look at natural gas trends suggests that the EU could be going for overkill with its efforts to suppress demand. Virtually every market signal points to a market that has more than enough gas with little danger of running out. EU gas stores as of March 2023, following the cold season, were 55% full, more than double a year ago level (26%). European gas inventories by 30th April clocked in at 68.9bcm while injection levels remain healthy. The rolling seven-day

average injection volume has now hit 1.93bcm from 1.23bcm just a week ago and is at

its highest of the injection season to date though it lags behind last year’s rate  (2.43bcm) and the five-year average (3.01bcm).

Meanwhile, EU gas demand has been rising, with commodity experts at Standard Chartered estimating that demand averaged 1,051 million cubic meters per day(mcm/d) in April, good for an 8% Y/Y increase. That demand was, however, 26% (214mcm/d) above the EU target reduction line. According to calculations by Standard Chartered, cutting current EU gas demand by 15% would bring it to within 1% of 2022 levels when the bloc was, understandably, at its most frugal as it tried to secure fresh supplies after dramatically reducing imports from Russia.

EU
Source: Council Of The European Union

But gas prices offer the best clues about the current supply/demand dynamics.

UK and European gas prices have continued falling, with the gas futures markets becoming increasingly bearish. Front-month Dutch Title Transfer Facility (TTF) contract for June settlement is now at a 21-month low of EUR 38.54 per megawatt-hour (MWh). TFF prices are currently 61% lower y/y at the front of the curve, which StanChart says is likely to spur higher industrial demand. 

‘‘There has been further closure of speculative longs, as well as fresh speculative

shorting across the oil complex. In our view, this is mainly based on a more pessimistic

macroeconomic outlook, which has helped to drive front-month Brent down to a four-

week low below USD 76 per barrel (bbl) in early trading on 2 May, taking prices to

within USD 5.50/bbl of the 16-month low reached on 20 March. The move to the short

side has accelerated over the past three weeks and the latest positioning data (Figure

8) shows selling of both crude and products. Our crude oil money-manager positioning

index fell by 19.0 w/w to -50.8, the gasoline index fell 21.6 to 7.6 and the gasoil index

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fell 29.5 to a seven-year low of-98.9. Across the crude oil contracts covered, money-manager longs were reduced by 42.3 million barrels (mb) to 488.2mb, while money-manager shorts increased by 26.8mb to 122.2mb,’’ Standard Chartered Research has revealed

Gas prices in the U.S. remain similarly depressed. U.S. Henry Hub natural gas price is currently quoted at $2.13/MMBtu, down nearly 52% in the year-to-date and 77% below the August peak of $9.33/MMBtu.

Standard Chartered has warned that the gas markets risk facing more distortions ‘‘…if severe demand suppression continues much longer, despite significantly lower prices.’’

By Alex Kimani for Oilprice.com

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