In this particularly cool spring, the European Union is already preparing for next winter: European gas storage stocks are 63.2% full (as of May 5), a higher level than that of 2022 and the average of the last 5 years (47%), second only to what was seen in 2020, when the collapse in global demand due to the Covid pandemic pushed contracts front-month futures below 9 euros per megawatt hour (MWh).
To date, on the Dutch TTF market, the Natural Gas Future front-month it is trading around 31 euros/MWh, the same levels as three years ago, and almost half of the 54 euros reached last October 8, the day after the Hamas attack on Israeli soil which would then give rise to the massive counter-offensive of Israel, proving that – as predicted in November 2023 by Stephen Ellis, Morningstar strategist specializing in utilities – the impact of the conflict in Palestine on the gas market is irrelevant.
“Natural gas prices in Europe saw a fair amount of volatility in April,” commented Warren Patterson, head of commodity strategy at ING, in a May 7 analysis. “One-month futures on the TTF went from just over 25 euros/MWh at the beginning of April to almost 34 euros/MWh in the middle of the month, before falling below 30 euros/MWh at the end of the month. However, prices began to rise again in early May. Reduced Norwegian gas flows to Europe and a late cold spell across much of the continent increased heating demand in the second half of April.”
According to Patterson, however, this would be a temporary volatility: “Europe will reach 100% storage before the start of the next heating season,” says the analyst. “This should maintain downward pressure on prices and we expect the TTF to average 25 euros/MWh for the remainder of the pre-winter season.”
The map below shows the differences between countries in terms of gas storage.
The energy divorce between Russia and the EU
Following the Russian invasion of Ukraine, the EU succeeded in its primary aim: to abandon imports of Russian gas. After the painful increases in energy prices in 2022, in fact, we have witnessed a constant decrease in energy imports from Moscow, thanks to a combination of mild weather and declining demand. At the same time, LNG (liquefied natural gas) imports and the infrastructure to support them are growing rapidly.
According to Bruegel’s data, think tank political-economic based in Brussels, the EU has reduced imports of Russian fossil fuels from a high of $16 billion per month in early 2022 to around $1 billion per month by the end of 2023.
While Russia no longer enjoys extraordinarily high export earnings, thanks to record prices seen in early 2022, Moscow’s earnings from fossil fuel exports are comparable to 2019, largely due to a shift in fossil fuel exports. gas and oil to China, India and Turkey.
At the same time, to compensate for the reduction in Russian imports, Europe increased imports from other countries.
The LNG puzzle
The share of LNG in total gas imports has doubled, going from 20% in 2019 to 40% in 2023, thanks above all to the fivefold increase in imports from the United States. Russian LNG imports also increased, but in absolute terms this increase represented less than a tenth of the gas transit that passed through Nord Stream when it was operational. Finally, compared to the 2019-2021 average, EU natural gas demand decreased by 12% in 2022 and 19% in 2023.
In 2023, the global LNG market saw steady growth in demand, despite limited new capacity additions and lower spot prices compared to historical levels seen in 2022. According to analyst firm Energy Outlook Advisors (EOA), Ship tracking data shows that global LNG demand hit an all-time high in 2023, reaching 401 million tonnes (mt), up from 390 mt in 2022, which itself was a record year.
This increase in LNG has made European countries vulnerable to market volatility, especially since 70% of these imports are purchased on short-term contracts. Last year, exceptionally mild winter weather reduced heating demand in both Europe and Asia. In addition to the mild weather, the economic slowdown experienced in China between 2022 and the first part of 2023 has reduced Beijing’s LNG imports, but things are changing.
The Chinese awakening
Driven by Chinese demand, Asia remained the top destination for seaborne LNG cargoes in 2023, receiving more than 258 million tonnes, accounting for 64% of global demand. Also according to EOA data, last year China overtook Japan as the world’s largest LNG importer, with a 13.7% increase in its imports, after Chinese gas demand was affected by weakness in 2022. of the industrial sector, due to COVID control measures, and high spot LNG prices, caused by an unprecedented European appetite.
Now, however, the Chinese economy is showing signs of awakening: the first quarter of 2024 closed with growth of +5.3% year on year for the gross domestic product (GDP), a result above market expectations , even higher than the already ambitious objective that the Beijing government had set itself (which envisaged growth of “around +5%”).
And in fact, according to estimates from the Chinese Economics and Technology Research Institute (state-controlled), total Chinese imports of natural gas, both by pipe and liquefied by ship, reached the highest level ever recorded in the first quarter at 33 million of tons. The month of March alone, then, recorded a leap of 21% year on year.
At the same time, China is expected to add a record 60 million tonnes per year of new LNG receiving capacity in 2024, bringing its total LNG receiving capacity to 176 million tonnes per year, according to ETRI. , an increase of 52% compared to 2023.
According to the EIA (the US Energy Information Administration), “the growing consumption of LNG in Asia is a key uncertainty with potentially important implications for global markets”, and “the lack of long-term contracts in Europe increases the risk of supply during cold weather and price peaks and may also intensify competition for spot LNG between regions.” Also because, as underlined by EIA analysts, global LNG markets will see modest supply additions in the coming years.
Investment opportunities in the medium-long term
In short, there is no shortage of unknowns. “Gas prices in Europe are likely to remain volatile for some time as the EU has to compete with the more price-sensitive China and to a lesser extent India and Thailand for LNG cargoes ”, explains Stephen Ellis, Morningstar strategist specializing in utilities. “This dynamic introduces greater price unpredictability, as the reliability of LNG cargoes is not guaranteed in the very short term at the most optimal price.”
However, the market is not currently expecting huge shocks in the coming months. On the TTF, natural gas futures contracts expiring in December 2024 are trading at 37.5 euros/MWh (around 20% more than current levels), while those for January and February 2025 are trading around 37.9 euros /MWh.
“Given that storage in the EU and US is very full, gas prices are likely to remain extremely low through 2024, before recovering in 2025 as renewed demand for LNG comes online,” Ellis continues. .
In this context, Morningstar analysts believe that the best opportunities are represented by companies that leverage the demand for gas at discounted prices, such as Kinder Morgan (KMI) and TC Energy (TRP), which will benefit from the increase in demand and supply of raw materials for LNG.
As regards the prices of US gas traded on the Henry Hub platform (remember that this is the underlying of the natural gas ETCs available to European investors, and not the one traded on the TTF) – which at the end of April were around $1.68 for MMBtu – Ellis says he “would not be surprised to see Henry Hub surpass $2 by the end of 2024 and $3 in 2025.”
