The beginning of the new year is marked by encouraging news from the energy markets. The price of the European gas benchmark TTF continues to freefall. Currently, it has reached up to EUR 55/MWh, i.e. significantly below the domestic price ceiling of approximately EUR 125/MWh.
Even in December, gas was sold for EUR 150/MWh, but since then the effect of an abnormally warm winter has worked, resulting in significantly lower gas consumption across Europe.
GRAPH: Natural gas price development (according to the TTF benchmark)
From 2019 to 2024 (forecast), in EUR/MWh.
To illustrate how important the impact of warm weather is in the Czech Republic – last week, according to Amper Meteo data, gas consumption was 35.2 percent lower year-on-year (at a temperature of 5.2 degrees higher).
And it is precisely the lower demand for gas that has resulted in a paradoxical situation in recent weeks. Domestic reservoirs have started to fill up again – completely uncharacteristically for this time of year. In the first week of January, the filling level of gas storage tanks reached 87 percent, which means significantly more than the long-term average for this period (70 percent).
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Sustainability of the price decline
Let us remind you that Europe was already hit by a wave of warm weather in October. This time, however, there was not only a drop in spot prices, but also long-term contracts on the wholesale market.
The TTF forward curve now sees the gas price for next winter 2023/2024 even below EUR 70/MWh. (see chart above)
However, from our point of view, the current forward prices are too low, for at least one important reason. At these price levels, the European TTF benchmark is lower than the Asian JKM. In other words, the Asian market is the more attractive destination for most LNG tankers at current prices, which would be a problem for Europe in terms of spring/summer reservoir filling.
Furthermore, in our opinion, forward prices do not fully value the impact of the complete opening of the Chinese economy, or substantial growth in demand. And this will probably contribute to the further tightening of the global LNG market.
So are current gas prices in Europe sustainable? We are not convinced of this yet, however, if the weather continues to surprise positively, it is possible that Europe will end the winter with solidly filled reservoirs. Lower prices could then be maintained.
But if Europe needs to fill the storage capacity to a greater extent, then it will have to – in the absence of Russian supplies – attract LNG tankers to its shores. And for that, higher gas prices on the old continent will be needed…
