European gas prices hit multi-year high

With summer drawing to a close, European gas prices have hit a multi-year high, piling economic pressure onto the continent ahead of winter.

European natural gas prices shot up over €73 per megawatt hour, the most expensive since late 2022.

The Dutch TTF price – a benchmark for LNG arriving in northwest Europe – hit $25/MMBtu on September 2nd, also the highest level in years.

At the start of September, EU gas storage levels reached only 65 percent full, sharply lower than the average for this time of year – just a few weeks away from the start of seasonal drawdowns for heating. Some countries have higher inventories than others. Italy’s gas sits at 83 percent full, while Germany’s is just 53 percent.

Prices have not reached such heights since the aftermath of Russia’s 2022 invasion of Ukraine. That year, the global spike in gas prices resulted in consumer gas and electricity bills in Europe soaring to record levels. In response, the EU put into place an annual 90 percent storage target, to be reached by November 1st ahead of the winter season, although that threshold was subsequently softened to 80 percent.

With TTF prices now hovering around $23-$25/MMBtu, more than double pre-war levels, refilling gas storage today from spot cargoes is painfully expensive. Increasing gas storage to 75 percent would cost more than €7 billion ($8.1 billion) at current prices.

Sky-high energy costs are the principal driver of inflation across Europe, which jumped to 3.3 percent in August, up from 2.9 percent in July. That, in turn, could force the European Central Bank to hike interest rates, imposing a further drag on economic growth.

Complicating matters, Europe is facing stiff competition for cargoes from Asian buyers. The Asian benchmark price – JKM – is also trading at $24/MMBtu.

“A bullish Asian outlook could provide further support, requiring TTF to remain competitive for uncommitted LNG cargoes,” Kpler senior LNG analyst Laura Page wrote in a note. She added that Norway would be undertaking seasonal maintenance on gas pipelines, which would reduce gas flows to the EU for several weeks.

There is little relief on the horizon. In late August, Qatar yet again extended its force majeure on LNG deliveries, canceling five cargoes through early November for Italian utility Edison.

It is too late for the possible return of Qatar LNG before winter, “leaving Europe entering winter with the lowest storage in 15 years and almost no buffer to cold weather,” Morgan Stanley analysts wrote in a September 3rd research note. “We raise our TTF forecast to ~€85/MWh this winter, as we still see risk skewed to the upside.”

Expensive LNG

While far below pre-war levels, a substantial volume of crude oil is sneaking through the Strait of Hormuz. But that is not the case for LNG. Traffic remains close to a standstill.

Shipping by “dark” fleets is much more complicated for LNG than for crude oil. As Bloomberg notes, there are far fewer LNG tankers and ship-to-ship transfers are much more difficult.

“Europe’s LNG receipts are at a multi-year low, adding further risks to its gas storage refill outlook,” Vortexa analysts wrote in an August 27th report.

The Strait of Hormuz is sort of closed, but sort of open, and has entered its “Hotel California Phase,” the Oxford Institute for Energy Studies (OIES) said in a recent report, “where LNG tankers in the Gulf can ‘check out any time they like but they can never leave’”.

However, even a trickle of supply getting through is helpful. The result is high prices, but not as high as would be the case if Hormuz shipments were shut down entirely.

Seeking to offer some reassurance, the EU’s Gas Coordination Group, an advisory body, said in a September 3rd statement that “there is no immediate risk for security of gas supply in the EU.”

One difference today compared to the 2022 crisis is that European gas demand has declined significantly in recent years, down 20 percent compared to pre-2022 levels. The EU may no longer need storage levels as high as it has historically needed them.

Meanwhile, LNG supply has increased elsewhere. “[H]igher levels of LNG production from the US, especially, and from Australia, Nigeria and Oman seem set to support LNG supply,” OIES said.

Eye-watering prices are also cutting into consumption for less affluent customers, suggesting there is some sort of limit to how high prices can go before buyers balk.

“There are also some early signs that the recent increase in prices to over $20 per MMBTU may be beginning to have an impact on Asian LNG demand, and the TTF/Asia differentials narrowing to support more LNG coming to Europe,” OIES wrote.

Pakistan recently opted against buying a spot cargo at $27/MMBtu, a price the state-owned Pakistan LNG Ltd. decided was too expensive. The company reissued the tender, but periodic blackouts in the near future are a real possibility.

“[T]he combination of a marginally better overall LNG supply situation and weaker Asian demand would allow more LNG for Europe to help support higher gas demand in power and maybe allowing storage to meet at least 70% refill by the end of October,” OIES said, referring to EU gas storage.

Europe could manage its way through even an abnormally cold winter with gas storage 70 percent full, the institute added.

“However, prices would likely stay elevated over the winter.”