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Gas hits bottom but threatens another inflationary wave: 50% depends on the US

Date: June 3, 2023 Time: 23:57:43

The winter season has ended in the northern hemisphere with great relief for all of Europe, strangled since the start of the war in Ukraine 400 days ago by the threat of supply cuts from Russia and, consequently, the warning of possible massive blackouts in the the industry that had suffered a deep economic recession. Barring the ‘match-ball’, energy operators are already looking to next winter 2023/24 as a new stress test that will raise prices and also reactivate inflation in the economy.

Why have gas prices fallen so much? The warmer-than-expected winter between 2022 and 2023, together with the filling of strategic reserves in advance and the increase in production of liquefied natural gas (LNG) from other countries -mainly in the US- has managed to keep prices at this level in line since January. fuel at minimum levels from a historical point of view at the Henry Hub reference in Louisiana, one of the reference reception, extraction and distribution centers in the Eastern United States.

The price of the US gas contract with delivery in one month is trading at 2.1 dollars, almost 80% below its August highs when it touched 10 dollars. It has remained stable in a range of 2 to 2.4 for two months, historically low levels that it has only visited in 2020 after the recession caused by the Covid-19 pandemic and in episodes of overproduction by the ‘fracking’ industry in 2016, when there was a boom in energy companies dedicated to extracting gas with hydraulic fracturing technology. Today the US multiplies the production of those days but has found an extraordinary demand in Europe due to the need to reduce purchases from Russia.

“US prices are hovering near half the long-term average and approaching levels that have only been seen – briefly – four times in the last 25 years. The US has posted one of the three hottest starts to the year warm since 1895. This has caused consumption to be lower than last year and stocks to be 23% above average,” explains Ben Laidler, Global Markets Strategist at eToro.

The US Department of Energy (EIA) forecasts a price recovery in 2023, to an average of $3, 50% above the current level, driven by double-digit increases in LNG demand and seasonal electricity demand . “But the supply response has been slow compared to previous price lows. US natural gas rigs have warned 18% over last year, while the last two price lows saw falls of between 60 and 80% with respect to the maximums”, adds Laidler.

Not all countries have reduced the import of Russian gas. Spain, for example, has doubled it throughout 2022 to make the Kremlin one of the four reference countries behind the US, Algeria and Nigeria. Russia represented barely 8% of the total before the war and has exceeded 15% for several months, according to official data from the operator Enagás and the Cores agency. The American gas industry took over as a reference supplier for the Old Continent with the methane tanker trains that have crossed the North Atlantic throughout the winter towards the regasification companies in France, the Netherlands and Spain, which accounted for more than 50% of exports to other countries of US LNG.

The Old Continent’s exposure to the LNG spot market has pushed from 20% to more than 50% in the last two years

Prices will double until the end of summer

What seems certain, according to the experts, is that the prices that are now seen on the screens will have little to do with those that will be in a few months when next winter’s supply comes into focus again. The investment bank Goldman Sachs sees a recovery in prices above 100 euros at the end of the summer due to an increase in demand dammed up for weather reasons, the decrease in the consumption of coal to generate electricity and the reopening of China, one of the big consumers.

“But this price drop has its limits. In Europe, attention is beginning to shift from the winter heating season to reconstituting the necessary reserves for the coming winter. Against this background, there is a risk that Russia will run out of supply and for China to compete again with LNG. Asian demand for LNG is usually more than double that of Europe in the last two years,” adds Laidler, from the broker eToro.

The price of the Dutch TTF, the European reference, has been trading between 40 and 50 euros per MWh in recent weeks, 75% below the all-time highs of a year ago when they reached 345 euros. According to Equinor’s converter, 2.1 dollars per mmBtu (million British thermal units) is equivalent to a price of 6.5 euros per MWh. However, most of the gas that has entered European networks since the war comes from LNG (liquefied gas), which has high intermediary, transport, management and storage costs that multiply its price almost tenfold.

In the case of the Iberian gas market, Mibgas, prices have fallen even lower, below 40 euros / MWh, thus leaving the so-called gas cap, a mechanism by which electricity consumers pay with your electricity bill, the amount that exceeds that level in the gas used to generate electricity, to a large extent because they have to pass it on to their own customers.

However, the real reason that other experts point to has been the increase in the entry of gas from Russia into the Spanish network, unlike what has happened in other countries, according to industry sources. Iberian gas collapsed in October as supplies from the US and Russia came to account for close to half of Spanish imports. The supply of the two great powers in conflict in the Ukraine also relieved pressure from Algeria, the previous supplier of reference before the war, which made prices more expensive for Spain after the diplomatic crisis with Morocco.

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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