Full storage, lower demand, and mild weather have all helped to ease concerns about a rise in heating and power costs. However, socioeconomic power dynamics are constantly shifting and as a result the European prices on natural gas are suddenly dropping.
Russia’s natural gas exports to Europe are declining and the war in Ukraine is heating up. This would suggest higher fuel prices. However, the price of this fuel, which is essential for heating homes as well as powering electricity plants, has fallen.
This week, the benchmark European natural gas price fell by more than 70% from its August record high. The main reason for the drop in prices is Europe’s current supply of natural gas.
This is because Europe, its main supplier for many years, has reduced its natural gas flow.
Businesses and governments across the continent have been aggressive in replenishing gas stored in their storage. Energy companies and governments have filled underground caves and other facilities to over 90 percent, as opposed to less than 80 percent a year ago, at the request of European Union officials.
High prices have driven many companies that sell natural gas to flood the European market. L.N.G. (Liquified Natural Gas) was a special ship that transported huge quantities of natural gas from the United States, Qatar, and other countries (including Russia), to Europe.
There was such a rush to sell to Europe that ships are now stranded off the coast, waiting for unloading slots at busy terminals. The glut is illustrated by the fact that at least one L.N.G. has been unloaded in recent days. According to Laura Page, an analyst with Kpler, a research company, the carrier that was heading from Algeria to Europe seems to have turned to Asia to find a better deal.
Europe’s gas reserves are a significant buffer against any further cuts or shocks from Russia.
“You have storage levels that people couldn’t even dream of a few weeks ago,” Massimo di Odoardo vice president for gas research at Wood Mackenzie Consulting, said.
The demand for natural gas has also fallen, which is another reason why prices are falling. Residents haven’t needed heat as much due to a warmer autumn than usual in many parts of Europe.
Analysts warn that recent drops in gas prices may be temporary — natural gas set to be delivered to Europe in the winter is already being traded in futures markets at an impressive markup to current prices. These unusually large price swings that Russia has experienced in recent months due to its tightening of gas supplies are likely to continue.
Even though gas prices have fallen in recent years, they are still historically high in Europe. They trade at twice the level of a year ago, and at a higher level than long-term averages.
Many energy-hungry businesses such as aluminum smelters and steel mills, and fertilizer plants, have been forced to close down temporarily. Italy is a major gas consumer and August and September saw a drop in demand for the fuel by around 10 percent.
Analysts say that markets have been affected by the threat of regulation. Analysts believe that the recent agreement by the European Union to impose a gas price ceiling, although it is still unclear in detail, will likely lower prices.
Henning Gloystein, director of Eurasia Group, an international political risk firm, said that in the short term, lower prices could cause some pain.
European utilities, which buy gas to generate electricity, have already suffered losses from the Russian gas cutoff and may have ordered high-priced L.N.G. to make up for the loss of supplies. They could now be stuck with fuel due to lower-than-expected demand. Gloystein stated that this could force utilities to sell expensive cargoes elsewhere at a lower price, possibly causing significant fiscal damage.
Low gas prices may also make it less attractive to develop more expensive clean fuels such as hydrogen. It could also act as a stopper on the re-engineering of commodities markets to break down the link between natural gas and electric power, even though some analysts believe that it is inevitable.
Martin Young, a London-based analyst with Investec, an international investment bank, stated that “the ball is rolling” and that there is widespread acceptance of the need to change.
Experts warn that it is premature to be optimistic about the prospects of cheaper gas. Markets are responding to changes in circumstances that might not last. Futures prices of natural gas for delivery in January 2023 and February 2023 are more than 40% higher than in November.
If Russia cuts off gas flows to Europe via Ukraine, or if there is sabotage to energy infrastructure like the unexplained ruptures in Nord Stream pipelines running from Russia to Germany, prices could be affected.
The weather is another factor. Jonathan Stern, the founder of the Oxford Institute for Energy Studies’ gas program, said that the “test” will be when there is a cold snap and storage runs dry. “We’ll see how the market reacts.”