Due to weaker-than-expected demand, the stock market price of natural gas fell further this week. Next month’s gas price on the largest European gas exchange, the Dutch one TTFclosed the week at 30.05 euros/MWh on Friday, May 19.
The last price level lower than this was almost 2 years ago, on June 18, 2021. With this, the weekly decrease in the price of the defining product from a European perspective continued for the 7th week, which is the longest negative streak since 2020.
The listing opened the year 2023 above 77 euros, that is, it fell by more than 60% this year, and compared to the peak of 339 euros reached in August 2022, it is already down 90%.
The price drop is driven by several factors, above all the high inventory level of European gas storage facilities, the abundant supply of LNG, economy, the weaker form of the industry, the mild weather conditions, as well as the also restrained demand in Asia. Given the weak demand for gas and electricity, as well as the sufficient supply, there is a significant chance that European gas storage facilities may reach full capacity before autumn, which could act as another price-reducing factor on the gas markets. On May 19, it already approached 65% of the EU’s gas storage capacities its chargewhich is close to the highest rate of the last ten years.
The European gas market is therefore quite calm, which can only be shaken by the simultaneous occurrence of several adverse effects of another extreme summer. The upcoming “climate season”, i.e. the possible hot, dry summer weather conditions in Europe, may have an upward effect on electricity demand, while, like last year, it may moderate hydropower and nuclear power production, which may also push gas prices higher, as the Asian LNG the expected upswing in demand as well.
The planned European Union import ban on Russian LNG and pipeline imports (Polish and German pipelines), on which Moscow had previously stopped deliveries, may also have a moderate effect in this direction. However, based on forward pricing, a significant increase is not expected before the next heating season, as the futures for the fourth quarter of 2023 are currently below EUR 50 develops.
European natural gas demand is thus currently much weaker, and European gas prices have fallen to a much lower level than what could be expected before.
This is also helped by the fact that, after last year’s price shock, not only the continent, but also the manufacturing industry of the United States and China has not regained momentum, and in Europe, more than one major consumer, such as smelters, could even close permanently. In addition to the above, the weaker-than-expected demand for LNG in China can also be explained by the fact that, instead of imported natural gas, it seems that they would rather start the economy with domestically produced coal, which is the cheapest source, since cleaning the air in cities is not a priority for them, as is less polluted natural gas. using it in a larger proportion – he told our newspaper Tamás Pletser, oil and gas industry analyst at Erste Bank. He also drew attention to the fact that China’s own gas production is also expanding, and that a larger amount of the energy carrier is coming to the country from Russia.
In the fact that, thanks to the fall in the recent period, European gas prices have become reasonably close to the average of 20 euros/MWh between 2010 and 2020, the change in the strategy of the Russian supplier also plays a role, although the partial data for May seem to contradict this. According to the indications of the leading European gas importers, compared to the uncertain, decreasing volumes seen in the second half of 2022
since January of this year, the Russians have practically stably delivered the contracted quantities on the remaining delivery routes (Ukrainian transit and Turkish Stream), presumably trying to maximize the revenues of their budget, which is in BIG TROUBLE, by increasing the volume, instead of trying to drive prices up by curbing exports.
There were also expectations among European gas traders, according to which during the summer, the Russian exporter will flood the market even more on the free capacity of Turkish Stream, which could have a further downward effect on prices Pletser added. (On our cover photo, Russian President Vladimir Putin talks with Gazprom CEO Alexey Miller.)
The demand for natural gas is moderate despite the fact that, due to the fall in gas prices and the increase in the price of carbon quotas, gas-based electricity production is more and more worthwhile compared to coal-based production in Europe. Also due to the restraint of industrial production, the demand for electricity remains low throughout Europe, and renewable energy production is traditionally strong in May, while the price of coal also decreased significantly, but to a lesser extent.
Index (clean spark spread, CSS) indicating the profitability of the production of natural gas-fired power plants (under average utilization) from the end of February to March, it began to exceed the similar index of coal-fired power plants (clean dark spread, CDS). In addition to the decrease in the price of natural gas exceeding the price of coal, the increase in the price of carbon dioxide emission units also contributed to the process, after their exchange rate exceeded 100 euros (/ton) by the end of winter.
Since the CO2 emissions of gas power plants per unit of energy production are approximately half of those of coal power plants, the increase in the price of carbon quotas increased the competitiveness of the former against the latter.
All of this indicates the justification of the coal -> gas fuel change (“switch”), i.e. in the following, gas may gain more and more significant space over coal in the production mix.
The growing competitiveness of gas-based power generation against coal is also shown by the fact that the gas demand of the electricity sector in Germany increased by 5% in March compared to the average for the years 2019-21, Bruegel meaning according to
As we reported earlier, the subject was also dealt with in the gas market report of the European Commission. According to the report, the coal -> gas switch could have already started in January 2023, and based on the natural gas, coal, and carbon quota futures, this may remain the case for the rest of the year, i.e., the displacement of coal from the production mix that has been going on for years may continue. At the same time the profitability index of coal-fired power plants for 2024 continues to exceed that of gas power plants based on forward pricing. In Germany, the CDS for coal power plants (with 38% utilization) is around 20 euros/MWh, and the CCS for combined cycle gas turbine power plants (with 50% utilization) is around 4 euros/MWh, according to Petr Bartek, utility sector analyst at Erste according to
Despite the significant drop in gas prices, due to the low electricity demand and prices, as well as increasing renewable energy production, the profitability of both natural gas and coal-fired power plants fell into the negative range in March. Due to the strong decrease in CSS, the production of natural gas-fired power plants in Hungary also increased significantly in March fell: the decrease was 27% compared to the previous month and 25% compared to the previous March.
The drop in gas prices – mainly due to the curtailment of Russian deliveries – in 2022 after a long time led the European electricity sector in the direction of a gas -> coal fuel switch, and with this, in the heating season left behind us, coal-based electricity production will approach the level of gas production fell in annual comparison (-11% vs -13%). In the longer term, however, it is expected that the profitability of all European fossil thermal power plants will be under significant pressure due to the increase in renewable energy production, also overriding the improved profitability of gas power plants compared to coal – He told Emma Champion, analyst at BloombergNEF.
Cover image credit: Mikhail Svetlov/Getty Images
