Demand Crisis Pushes European Gas Prices Down

Natixis CIB is honored to be an exhibitor at the E-World conference, the world's leading trade fair for the energy industry – which takes place in Essen on February 20-22.

On this occasion, Joel Hancock, Commodities Research Analyst, shares his views on the European Gas Market, in an interview and a series of reports.

Yes, we do see this trend being maintained, with both cyclical and structural drivers at play. Structurally, the market, policy and consumer responses to the gas price crisis have triggered a sort-of “demand crisis”. Shifts in consumer behavior, major investments in renewables (particularly solar), progress towards electrification (such as the installation of heat pumps) and government support for energy saving measures (insulation, smart meters) – alongside the permanent loss of competitiveness for European industry in several sectors have structurally lowered gas consumption in Europe.

In addition, the winter has been fairly mild, although it should be noted that the residential and commercial consumption response to lower temperatures remains significantly impaired relative to pre-crisis, in large part due to the structural drivers mentioned above. Cyclically, we do expect some demand support to arise as lower prices feed into consumer tariffs, although this effect is likely to be offset in part by the relatively weak macro environment, which will continue to weigh on gas-intensive industry.

On the supply side, we expect European LNG availability to remain relatively high, with weak Asian demand for cargoes.

With limited capacity to create demand, we see prices moving progressively lower to attempt to curtail supply, before eventually pricing for storage containment later in the injection season.

Indeed, it does seem the market has turned from being concerned about sufficient levels of gas in storage, to being concerned about storage capacity availability! The 2022 and 2023 injection seasons have both ended with strong contangos to the forward winter market as oversupply has necessitated the use of “overspill storage” in the form of floating LNG storage and Ukrainian gas storage.

This can be interpreted as signaling insufficient conventional gas storage capacity globally, with the replacement of Russian gas with LNG for baseload European gas supply requiring a higher global storage capacity, given the lower flexibility of the latter. This will be more pressing from 2026, given the large increase in global LNG capacity expected.

With a lack of adequate storage candidates in Asia and the lack of appetite for additional long-lived fossil-fuel investments in Europe, this storage capacity is likely to be built in the US, which will necessitate wide price swings to encourage utilisation via LNG cargo cancellations.

In the short-term, we maintain our long-held bearish view on Cal-24 prices, expecting TTF to average €29.5/MWh in 2024, and €30.5/MWh in 2025. Prices should move lower into 2026 as a wave of LNG supply reaches the market, although markets may actualise tighter than expected if LNG availability disappoints.

This could be driven by a range of factors, including degradation to Russian LNG facilities if the current sanctions regime is maintained, project delays, political shifts in exporter countries and feedgas declines for legacy terminals.