Europe’s natural gas market is the most bullish it has been in years, as higher-than-expected summer demand and a tighter market drive natural gas price futures to levels last seen during this past winter’s supply crunch and to the highest for a summer season.
Natural gas prices are expected to stay strong and may still have room to rally, ahead of the next winter heating season in Europe that begins in October, analysts and traders tell Bloomberg.
Contrary to the typical summer lull in Europe’s gas prices, this year the front-month gas price in the UK - Europe’s biggest gas market - for example, is nearing the winter price from December 2017 when a deadly explosion in Austria’s gas hub at Baumgarten squeezed supplies throughout Europe. Immediately after the explosion, the price of gas for immediate delivery in the UK reached its highest level since 2013.
The past winter season in Europe was one of the coldest this decade, sending gas demand soaring and the level of natural gas stored in tanks across Europe dropping to below average levels.
Russia - which already supplies around one-third of Europe’s gas - boosted deliveries in the winter, and continued to ship higher volumes even after that, as gas importing countries were replenishing gas storage supplies that had been drained amid the cold snaps.
Come spring, demand in Europe stayed high. 1st, because gas storage levels were low, and 2nd - because some of Europe’s other traditional gas-supplying countries decreased supplies over issues or maintenance at facilities.
Then summer came and with it a prolonged scorching heat wave across most of Europe for most of July and August. Demand for gas jumped again amid a tighter market and spot cargoes of LNG going mostly to Asia - China in particular - as sellers profit from selling their LNG on the Asian market where prices are higher than Europe’s.
China’s LNG demand is attracting LNG cargoes and Northwest Europe these days serves as a terminal for transfer of LNG for re-export to the Asian markets. Although the UK benchmark gas price is at its highest for this time of the year, Asian spot prices are even higher, so LNG spot cargoes go to the higher bidder. Spot prices in Asia are also pushed up by a heat wave there - record high temperatures in Japan have led to strengthened East Asia spot LNG prices over the past month as Japanese and South Korean utilities were back on the market looking for spot September and October cargoes to refill storage before winter comes, said Alex Froley, LNG Analyst at ICIS..
With Asia snapping up LNG supplies, European gas markets stay tight, with demand high and natural gas storage levels low and in need of replenishing before winter comes. Further boosting gas demand is utilities across Europe seeking more gas-fired power generation because the prices of EU carbon dioxide (CO2) emissions allowances under the EU Emissions Trading System surged to a 10-year high, so utilities prefer to use more gas-fired power generation at the expense of the more emission-intensive and polluting coal.
Another side effect of the heat wave across Europe also helped boost gas demand. In France - which depends on nuclear power for around 75 % of its electricity demand - EDF had to halt for some time four nuclear reactors at three power plants because of high temperatures of the Rhone and Rhine rivers whose waters are used by the nuclear facilities for cooling.
The hot summer in Europe has also been hot for natural gas prices that have never been so high for this time of the year. According to traders and analysts surveyed and briefed by Bloomberg, the gas price rally will likely continue in view of the coming winter, unless there is unexpected lower demand in the winter or an oversupply of natural gas.