Slight drop in gas prices does not mean they will remain low this winter, experts say

The recently observed rapid drop of gas prices on the exchange does not mean prices will continue dropping and will remain low this winter, bank economists say.
Bank of Latvia economist Dace Bērziņa says that after a rapid climb in the second half of summer gas price in Europe have dropped just as rapidly in recent time. At the end of the session on Monday, 17 October, the price of gas at the exchange was 125 EUR/MWh.
According to Bērziņa, there are multiple reasons for gas prices going down. For example, countries in Europe have managed to fill their gas storage facilities, which offers some stability for the winter season. Especially in Germany, where industrial and power production is based heavily on intensive gas consumption, gas storage facilities are 95% full thanks to reduced industrial activity.
Additionally, Bank of Latvia economists say that slowed economic activity in China worked in Europe’s favour. The country’s zero tolerance policy towards Covid-19 and overheating of the real estate market also helped. As a result, LNG supplies initially intended for China’s market were diverted towards Europe. This assisted with filling Europe’s gas storage facilities, reducing pressure on gas prices still sharply reacting to diminishing supplies of Russian gas.

Bērziņa said that weather conditions were better and austerity measures in Europe promoted lower gas consumption.

Discussions about switching on Germany’s remaining nuclear power plants until string 2023 also helped reduce concerns about an energy crisis in Europe and promoted further reduction of gas prices.
«This does not mean prices could continue going down and stay low for the entire winter. Weather conditions play an important role in all this,» said Bērziņa.

«If winter turns out severe and we see Europe’s gas storage facilities draining despite all austerity measures in place, the gas price will likely start increasing again.»

She also explained that the available data indicates that members of the financial market do not expect gas prices to return to their pre-crisis levels soon.
According to available financial data, the gas price may fluctuate at 150 EUR/MWh in 2023 and 115 EUR/MWh in 2024.
Luminor Bank economist Pēteris Strautiņš mentioned that the situation in the European gas market has improved from the buyers’ perspective. In August gas prices reached 300 EUR/MWh. This was when Russia ceased supplying gas using Nord Stream 1 branch. This caused panic among buyers.
Strautiņš noted that since then there have been multiple developments that benefited consumers. European gas storage facilities were filled faster than expected, for instance.

The goal set by the European Commission was to secure 85% of gas stores before the start of the heating season. The result turned out 92%, increasing by 0.2 percentage points every day.

Additionally, he said, the weather in Europe has been relatively warm so far, which means additional gas storage options gradually become more limited. This is why the price is going down rapidly. Just recently – between 7th and 13th of October – the price fluctuated at around 160 EUR/MWh. On 18 October the price was 125 EUR/MWh, whereas on 25th and 26th of August the price was higher than 300 EUR/MWh.
Strautiņš explained that in a situation when gas prices are high, consumption is low. «This is not always 100% good news. Gas consumption in Latvia is down by one-third mainly because operations are down at Riga TEC-2. Imports of gas are also replaced with imports of expensive electricity,» said the economist.
«Achema mineral fertilizer manufacturing company has shut down in Lithuania. This means lost jobs and loss in exports of chemical products. However, part of the reason behind the drop in consumption comes for increased efficiency,» he said, adding that the this allows for a more optimistic look at the future.

«This is the big advantage of a market economy – price signals motivate people and companies to look for and use opportunities no one could have predicted.»

«This is why we can hope gas consumption to go down more rapidly than planned,» said the economist, adding at the same time that this does not mean gas prices will continue going down.
He explained that the situation can change for the worst in many different ways. European gas storage facilities have enough gas to satisfy approximately two months consumption volumes that were present when Nord Stream and the gas pipeline going through Belarus and Ukraine were still in use. Limited gas supplies still go to Europe from Russia, but they will end.
Supplies from Netherlands’ Groningen gas field will likely continue going down, as gas production is limited due to local earthquakes caused by intensive gas production. Strautiņš hopes decisions regarding limitation of gas production will be changed.

He also stressed that the risk of sabotage on gas pipelines that supply gas from Norway is a possibility. This kind of development, however, could cause Article 5 of NATO treaty go into effect. This is why risks are low.

Gas prices in Europe remain about twice as high as oil prices, which is not normal, said the economist, adding that usually it’s the other way around.
Futures indicate that in 2025 gas may become cheaper than petrol products in Europe again, but this does not mean gas prices will have returned to their usual 20 EUR/MWh, said Strautiņš.

«Gas prices will likely only increase in the near future.»

«Gas will become cheaper as supplies go on. However, the difference with fast, monthly supply contracts keeps increasing. Current estimates show that in a year gas will cost 153 EUR/MWh or EUR 22 more. This is the biggest difference yet. Short term contracts were cheaper in the past. If annual gas does become cheaper, however, the price of contracts may start ranging around EUR 120 in two years or so,» said Strautiņš.
SEB Bank’s macroeconomics expert Dainis Gašpuitis said the warm weather is what largely dictates the gas price, as do the nearly full gas storage facilities and rich LNG offers. All of it has reduced stress regarding the availability of gas, at least in the short term perspective.

He explained that the most important factor that will dictate the price this winter will be weather, which will influence demand in Europe, Asia and the U.S.

In addition to that, weather has so far been good for the production of renewable energy. Gašpuitis also said he hopes weather will remain favourable.
He said at the end of September gas consumption went up because air temperature was below average. However, the first days of October were warmer than usual and consumption went down. Consumption in Germany remains 20% below average. When compared to historical values, general consumption in Europe, except the UK and Spain, has gone down by 8.4% in ten days.

Europe’s natural gas stores are above 1 000 TWh or 91.6%.

«It seems you can fill up storage facilities down to the last molecule. In seven countries gas stores exceed 95%, in eight countries volumes are between 84% to 94%,» added Gašpuitis.
He also said there is a possibility that Europe may experience severely cold weather before the end of the year. Nevertheless, winter is expected to be warmer than normal. «If weather forecasts come true and winter turns out war, gas prices may drop to very low values. If demand is high in Europe and globally and Russia completely ceases supplies, prices may reach new heights. There are many risks. However, at the moment the scenario for Europe and Latvia is so far looking very favourable,» explained the economist.