European gas prices dropped to a three-month low on Monday thanks to milder weather, European storage levels approaching capacity and high imports of liquefied natural gas (LNG) by EU countries.
Dutch front month futures – the European benchmark price – dropped by as much as 8% to €144 per megawatt-hour, the lowest since July.
The drop comes after the European Commission said over the weekend that gas storage levels had surpassed 90%. That came alongside a forecasted period of milder weather, which could mean a curb in gas demand.
Analysts suggest the LNG market is “facing its most violent year yet” as countries scramble to replace the 40% of total gas in Europe, which has been lost since Russian began to choke gas supply. Bloomberg reports LNG imports to Northwest Europe have been at a six-year seasonal high.
According to Francisco Blanch, Bank of America commodity strategist, European countries hiked up LNG imports by more than 50% year-on-year in 2022 to offset its growing gas shortfall.
“The EU rushed to replace these volumes via the LNG market, which is just over 3x the size of Europe’s newfound gas void, pushing LNG prices higher this year,” he said in a note on Monday.
Although warmer weather has been forecast for the next fortnight, he said cold weather could make the LNG market more volatile, as offshore terminals shipping the commodity can be impacted by more tropical/harsher weather.
Commentators even predict that, like the gold market, a localized gas market will become a global one.
The issue, Blanch says, is that global LNG supply is set to slow down — from 15 million metric tons year-on-year in 2022 to 12 million tons next year, with supply totaling 414 million tons.
The U.S is the biggest LNG supplier to the EU, representing up to 50% of total imports, according to the European Commission.
The U.S will drive most of the supply going forward, with facilities such as the Freeport LNG in Texas. Plus, Europe is on a mission to build out LNG terminals for ship imports, such as the Bunde-Etzel pipeline underground terminal in Etzel, Germany (pictured above), due to complete by the end of this year.
“We expect Europe to take in even more volumes next year as some Asian economies cut LNG imports further. LNG prices should see support so long as subsidies remain in place, however a global macro slowdown and nuke restarts present downside risks,” Blanch concludes.
Rallies in chemical producers
European chemical makers saw their stocks rally on Monday in light of the gas price news due to their reliance on natural gas as a base material for chemical production.
– all German chemical producers – rallied over 8% on Monday.
BASF’s energy costs have jumped upto €1.1 billion ($1.07 billion) in Q2 of this year, an €800 million jump compared with the same period last year. It uses natural gas to create electricity and stream to power its factories.
The Wall Street Journal reports that the company is developing more scenarios in its spending plan for next year to mitigate the fluctuations in gas prices, according to Hans-Ulrich Engel, BASF’s chief financial and chief digital officer.
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