As tepid demand for gas from power generation and industry has sent European natural gas prices into a freefall in recent weeks, traders and industry officials are not ruling out the possibility that Europe may see a brief dip to below zero for day-ahead prices in some markets this summer.
The combination of ample inventories at the end of a mild winter, steady imports of LNG, and weak demand has led to eight consecutive weeks of weekly losses in European benchmark natural gas prices, the longest weekly losing streak in more than six years.
While the benchmark price is unlikely to drop below zero, some regional day-ahead natural gas prices in Europe could see sub-zero prices briefly this summer, if demand remains weak and renewable power generation holds high, traders and industry officials at the E-World energy fair in Essen, Germany, told Bloomberg.
“Individual regional gas markets in Europe could go negative when you have hours and days with renewable production,” Peder Bjorland, vice president for gas trading and optimization at Norway’s energy giant Equinor, told Bloomberg.
“There is quite a big distance from the price level we see now and to the single-digit and negative prices, and a lot can happen on that route,” Bjorland added.
The front-month futures at the TTF hub, the benchmark for Europe’s gas trading, crashed by 10% on Thursday to settle at $26.78 (24.94 euros) per megawatt-hour (MWh), the lowest price since the start of the energy crisis in the autumn of 2021. Related: U.S. Shale Production Is Set For A Rapid Decline
The price trend in European natural gas prices is in stark contrast with last year, when benchmark prices soared to as much as $322 (300 euros) per MWh in August, after Russia slashed supply via pipelines and governments and industry were spooked by potential gas shortages in the winter.
Thanks to milder winter weather, reduced consumption on EU level, and demand destruction in industry from the high energy costs, Europe made it through the 2022/2023 winter without gas shortages or gas rationing.
Currently, gas inventories are comfortably high for this time of the year. As of May 24, natural gas storage sites in the EU were 66.71% full, according to data from Gas Infrastructure Europe. The level of gas in storage is the highest for this time of the year in at least a decade.
Europe could fill up inventories as early as September, well ahead of the winter, analysts have told Bloomberg.
Demand for natural gas in Europe is now weak after the winter heating season ended and peak summer power demand is yet to begin. Gas consumption from industry, which went through a very rough patch last autumn and winter, is also weak.
Despite falling gas prices, industrial consumption of the fuel is not taking off, although it is possible that large industrial energy consumers wait for a further drop in gas prices, analysts say.
Further price declines could put a floor under prices as more power plants could switch to gas from coal, Goldman Sachs said earlier this week.
“This substitution process can work as a temporary floor to gas prices until industrial demand and Asia LNG imports start to improve more visibly, which in our view will ultimately pull gas prices higher into late-summer,” Goldman’s analysts wrote in a note carried by Bloomberg.
The near-term outlook on natural gas prices in Europe looks bearish. But things could swiftly turn if demand spikes in summer heatwaves with low wind speeds that could cripple wind power generation. Industrial customers could also start using more gas if prices continue to fall, ultimately supporting the prices. A recovery in Asian demand for LNG could also result in higher European prices as Europe will have to compete with Asia for spot cargoes.
By Tsvetana Paraskova for Oilprice.com
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