September 26, 2022

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- Don't Be Speed ​​Blind - E24

– Don’t Be Speed ​​Blind – E24

Gas prices fell by about a third after a sharp jump last week. – From very high levels, says the analyst.

This illustration shows a major area of ​​natural gas use among Europeans, which is cooking. The photo was taken in a private kitchen in Berlin.
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The price of TTF gas has fallen by about €100 per megawatt-hour in a few days, and it’s trading Thursday at around €250 per megawatt-hour, according to Infront.

Although the price has fallen by nearly a third in one week, the price of gas still costs about five times what it did a year ago.

Commodity analyst Ole Hvalbye at SEB warns against adding too much to lower prices.

– When prices drop by €100 in a short week, it’s from very high levels, and it shows how volatile this market is, Hvalbye tells E24.

Read on E24 +

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– We must not forget that even after this fall, price levels are still very high. You shouldn’t be blinded by speed, and you should be careful in how you interpret this market, says Hvalby.

Thursday’s gas price corresponds to an oil price of around $400 per barrel, while last Friday’s peak corresponds to over $500 per barrel. In Europe, many consumers are desperate, and the industry is shutting down.

Electricity prices will also moderate on Friday, in both Norway and neighboring countries. Prices in the three southernmost price zones in Norway will be 4.36 NOK per kWh excluding grid rent and taxes. But despite the decline, it also rose above normal prices.

– He achieved his goal

Hvalby believes that EU gas stocks can help explain the drop in gas prices.

– Europe has reached its goal of filling natural gas reserves two months ahead of schedule, he says.

– Perhaps this was not so surprising, when we saw how quickly the stock piled up. But you may feel like you have a little more control now than you did a few weeks ago. In addition, the European Commission says that they Taking into account the To intervene in the market, this sends signals that current prices are too high and cannot be sustained, Hvalpay says.

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I think prices are dampening demand

Gas demand in Europe has fallen due to higher prices, and this is likely to continue, according to analysts at Wood Mackenzie.

This means that the storage situation now looks somewhat better than before for the upcoming winter, the company notes in a note on the outlook for the third quarter in the European gas market.

“High natural gas prices will continue to drive European demand lower,” Wood Mackenzie wrote.

They estimate that gas demand in Europe through March could be seven percent lower than the average of the past five years. In this case, inventories will be depleted less than if consumption had not changed.

A number of industrial players have stopped production due to rising gas prices, particularly in the fertilizer industry. Norwegian Yara shut down 65 per cent of its ammonia production capacity in Europe.

– Better than expected

At best, gas stocks in Europe could reach 31 percent in March, which is in line with the five-year average, Wood Mackenzie wrote.

Strong imports of LNG and non-Russian gas via pipelines helped Europe reach stock levels of 80 percent at the end of August, better than expected, says Massimo de Oduardo, director of gas and LNG research at Wood Mackenzie, according to a letter.

Director Massimo de Oduardo at Wood Mackenzie.

– We expect it to reach 86 percent at the beginning of October. If Russian deliveries via Nord Stream resume to current levels after three days of maintenance in September, Europe could be in a position to get through this and next winter without having to constrain demand, he says.

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The estimate assumes that gas consumption through March will be seven percent lower than the average over the past five years. It is somewhat lower than the European Union’s plans to cut consumption by 15 percent, which were announced recently.

In addition, the estimate assumes record high levels of imports of LNG, which is transported by ship. Many countries have requested LNG import terminals from players such as Norwegian Höegh LNG and Golar LNG, and this may eventually lead to increased imports.

Wood Mackenzie estimates that Europe’s gas reserves could be filled at best by up to 90% before the winter of 2023-2024.

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Feel like you have more control

Hvalbye at SEB supports the view that higher prices have helped reduce gas consumption in Europe.

These price levels are far from sustainable, so many in the industry shut down the factory and shut the door. He says it simply can’t work anymore.

– In the past ten days alone, gas demand in Europe has fallen by about seven percent, and in Germany the decline in demand has reached 23 percent, he adds.

If you exclude four of the major consuming nations, such as Spain, Italy, Great Britain and Ireland, consumption among countries in Europe has fallen by as much as 27 percent in the past 10 days, Hvalby notes.

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Cold weather changes the forecast

The outlook could worsen if there is a cold winter, or if Russia cuts gas supplies further, Wood Mackenzie notes in a note.

– Even if flow through Nord Stream does not resume after maintenance in September, European shares may eventually remain at 26 percent at the end of winter, though they will only then be able to get as much as 81 percent before next winter , says Massimo de Oduardo.

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Extreme cold is the worst danger. According to estimates, this could increase Europe’s demand for gas this winter by 30 billion cubic meters. This corresponds to about a quarter of Norway’s gas exports to Europe.

In this case, European shares could end at just four percent in March, after which they will only be able to increase to about 63 percent before next winter, according to Wood Mackenzie estimates.

The company believes that there will inevitably be a drop in demand.

Wood Mackenzie probably has a fairly good overview of this. It sounds very exciting to my ears, but inventory and consumption numbers are very sensitive to weather and temperature, so we’re at a disadvantage if we have a really cold winter, Hvalby says.

– He adds that in very cold winters, the market becomes cramped even in normal times.

Expect a more balanced market

Gas prices for future delivery are affected by uncertainty in the electricity market, with lower production from nuclear, hydroelectric and wind power and the risk of disruptions in the electricity supply, Wood Mackenzie notes.

Under normal weather conditions, we expect the energy market to end up with more equilibrium after winter, which along with the improved gas market equilibrium could lead to a 35 percent drop in gas prices, to levels close to what Europe has of late. In July 2022, says Europa Gas Analyst Penny Leake in Wood Mackenzie.

In late July, the price of TTF gas was around €200 per megawatt-hour, according to Infront.

However, Europe’s hopes of weathering this and next winter rest on record high LNG imports, which are expected to gain 40 percent market share in Europe next year, while Russia’s share drops to less than 10 percent. She says this assumes higher gas prices and that Europe is a distinct market for LNG globally.

Europe (excluding Turkey) is expected to reduce its dependence on Russian gas (light blue line) from 34% in 2018 to 9% in 2024, according to Wood Mackenzie. Reliance on imported liquefied natural gas (LNG, dark blue line) is expected to increase from 13 percent to 39 percent in the same period, according to analysts.