Consequences of Falling European Natural Gas Prices

by Wall Street Rebel - Michael London | 10/25/2022 9:27 AM
Consequences of Falling European Natural Gas Prices

Because of a variety of factors, including full storage, decreased demand, and warm weather, concerns about an increase in the cost of heating and power have been partially allayed, at least for the time being. This relieves many people's fears of facing the premise of an unpredictable winter with too little fuel to meet the potential demand.


The winter heating season is coming up, the conflict in Ukraine is raging, and Russian natural gas exports to Europe are declining. That would appear to be a formula for increased pricing, but the fuel cost, which is necessary for heating homes and powering industries and electrical plants, has been falling.

This week, Europe's benchmark natural gas price dropped to more than seventy percent below the August peak. The fact that Europe has enough natural gas on hand, at least for the time being, is one of the primary causes of the price decline.

That's because throughout the summer, as Russia, its longtime primary supplier, decreased its natural gas flow, Europe went on a worldwide shopping binge.

Governments and companies have actively refilled the amount of gas they have in storage across the continent. Energy corporations and governments have filled subterranean caverns and other facilities to more than 90% of capacity, contrasted with less than 50% at the request of European Union officials and at a great expense.


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Due to the high pricing, a flood of natural gas suppliers entered the European market. Special ships carrying massive quantities of liquefied natural gas, or L.N.G., sped from the United States, Qatar, and other gas-producing nations (including Russia), to Europe.

However, industry analysts are warning that the recent decline in gas costs may be only temporary because natural gas scheduled to be transported to Europe this winter is already being sold in futures markets at a significant markup to the current price. The abnormally substantial swings in price that have occurred in recent months as a direct result of Russia's actions to restrict gas supplies are likely to continue.

Even after the recent drop, gas prices in Europe remain historically high. Currently, they are trading at a level that is twice as high as it was at this same time last year, and they are even higher when compared to the long-term average.

As a direct consequence of this, numerous energy-intensive industries, such as aluminum smelters, steel mills, and fertilizer facilities, have been forced to close, at least temporarily. The demand for gas in Italy, a major fuel consumer, dropped by nearly 10 percent between August and September as compared to the same months in the previous year.

According to economists, another factor weighing on markets is the possibility of government regulation. The recent decision by the European Union to place a ceiling on gas prices is likely to result in reduced pricing, according to analysts, even though the agreement is still weak in details.

According to Henning Gloystein, a director at the political risk consultancy Eurasia Group, decreased prices may bring their own kind of anguish in the short term. This information comes from the statement of Henning Gloystein.


European utilities, which are in the business of purchasing gas to generate electricity and sell it to customers, have already suffered losses due to the cutoff of Russian gas. These utilities may have ordered more expensive L.N.G. to compensate for the lost supplies. Now, because demand has been lower than anticipated, they may be stuck with the fuel. According to Mr. Gloystein, "it could drive some utilities to sell their pricey cargoes much more cheaply elsewhere, which could potentially cause significant financial damage."


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The incentive to create alternative fuels that are more expensive to produce, such as hydrogen, could be reduced if gas prices fell. Furthermore, it could operate as a brake on the re-engineering of commodity markets to sever the relationship between electric power and natural gas, even though some analysts believe that the re-engineering will eventually occur.

Martin Young, an analyst at the investment bank Investec located in London, stated that "the ball is rolling," and he believes there is general acceptance of the need for change.

As a result of conditions that may not last indefinitely, market participants are reacting in a way that makes it premature to get comfortable with the prospects of cheaper gas, according to analysts. Compared to November's prices, natural gas futures contracts for delivery in January and February of 2023 are trading at a premium of more than forty percent.

Also, there's the climate. According to Jonathan Stern, who established the gas program at the Oxford Institute for Energy Studies, "the test will come when we experience the first cold snap and storage starts to deplete." It remains to be seen how the market responds to that.

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                     American LNG exports are surging, on the back of European demand

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