Gas and oil prices fall due to warm weather and economic concerns

Energy prices on both sides of the Atlantic have started the new year significantly lower as warm winter weather and worries about the global economy weigh on the market.

The declines stand in sharp contrast to early last year, when Russia’s invasion of Ukraine in February sparked energy supply concerns and sent prices soaring. European natural gas was a particularly big focus after Russia halted almost all of its pipeline supplies to the region.

Prices of the Dutch TTF, the benchmark European gas contract, fell more than 10 percent on Wednesday to €64.20 per megawatt-hour, the lowest since November 2021. Last August, they hit a high of over €340/MWh.

The gas sell-off came amid a broader downturn in energy markets Brent, the international crude oil benchmark, In intraday trading on Wednesday, it fell almost 5 percent to around $78.40 a barrel amid fears of a global economic slowdown and weak oil demand in China. US oil prices declined a similar amount to around $73.40.

The TTF decline over the past few days suggests the market is “confident that should another cold snap occur in the coming months, there will be enough gas in storage and LNG flowing to get us through this winter.” said Tom Marzec-Manser. Lead European Gas Analyst at ICIS. “The concern we may have had in August that Europe will end the winter with extremely low gas supplies is starting to dissipate,” he added.

Plunging TTF prices come as economic reports showed that consumer price inflation eased in major European countries including Germany and France late last year.

U.S. gas prices, which have remained far cheaper than Europe’s thanks to soaring shale gas supplies over the past year, have also slumped in recent days as a brutal deep freeze across the country gave way to warmer-than-expected weather and hit the heater Requirement.

Line chart of TTF (€/MWh) showing European gas prices erasing 2022 gains

Henry Hub, the US benchmark, traded around $4 per million UK thermal units (€13/MWh) this week, near the lowest price in almost a year and 40 percent cheaper than in mid-December. It partially recovered on Wednesday after falling 11 percent on Tuesday.

The slow restart of Freeport LNG, a huge export facility on the Gulf of Mexico, has also shut down a major gas consumer, creating further headwinds for US prices. The company last month again delayed restarting the plant, which was damaged in a fire last summer, until “the second half of January”.

American LNG exports surged last year as European buyers rushed to replace Russian fuel with supplies from the United States, helping push Henry Hub prices to a 14-year high of nearly $10 in August /Mn Btu were driven. But deliveries are now nearing maximum and no new plants will start production this year.

Moscow’s gas arming in the summer prompted the EU to implement a series of measures, including mandatory gas storage and consumption reduction targets, that helped Europe fill its gas storage facilities to more than 95 percent by mid-November.

While December has historically been a month when Europe’s gas storage facilities fell due to higher heat demand, this year Europe has sent more gas to its storage facilities since Christmas Eve.

According to the Gas Infrastructure Europe industry association, the storage facilities were 83.37 percent full at the end of December, around 30 percent more than in 2021 and more than 10 percent more than the average for the past five years.

If Europe continues to import record amounts of LNG and gas demand remains subdued, ending this winter with storage capacities above 35 percent, a five-year average between 2016 and 2020 seems “plausible,” ICIS’s Marzec-Manser said.

But while a full-blown European gas crisis has likely been averted for this winter, market participants are still concerned about winter 2023 as TTF gas futures prices for the fourth quarter of this year and the first quarter of 2024 are sitting more than €10 above current prices.

Traders fear Europe will struggle to access the same amount of LNG shipped on giant tankers by sea as China’s economy reopens after its zero-Covid policy ends, with sea freight the main substitute for Russian supplies are, which once met up to 40 percent of EU demand.

“There are so many unknowns that could significantly alter Europe’s supply-demand balance,” said Natasha Fielding, head of European gas pricing at Argus Media.

https://www.ft.com/content/c12ba784-4afa-4685-af75-6135b95da923 Gas and oil prices fall due to warm weather and economic concerns

Adam Bradshaw

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