European natural gas futures plunge 44% from peak

Above-target storage, floating LNG import terminals commissioned.

By Wolf Richter for WOLF STREET.

Natural gas futures prices in Europe, after rising 20 times since March 2021, have plunged amid falling demand, gas storage increases above target, a growing list floating LNG import terminals and an increase in LNG imports from the United States and other parts of the world.

The Dutch first-October TTF contract – a benchmark for northwestern Europe – plunged 8% on Monday from Friday, and 44% from the Aug. 26 peak, at €191.02 per megawatt-hour (MWh) as of today’s close (data via Investing.com).

The surge in futures prices was driven by speculation following Russia’s threats to cut, and then its actual cuts, in gas supplies to Europe. But these exorbitant prices have caused big changes, not only reducing demand, but also lining up new supply. And with this type of huge spike and then dip, there could well be big energy speculators and various hedge funds that have found themselves on the wrong side with massively leveraged positions.

Efforts to increase supply via LNG imports.

On Thursday, two floating liquefied natural gas (LNG) import and storage terminals went into operation at the port of Eemshaven in the Netherlands, when they received their LNG cargo from the United States. The EemsEnergyTerminal, as the two vessels are called, will receive its first commercial cargo this week.

These floating storage and regasification units (FSRUs) receive the LNG, store it, regasify it, then send the natural gas by pipeline into the onshore distribution network in the Netherlands, from where it can also be distributed to other other countries. .

The capacity of an FSRU is much smaller than that of a large land-based import terminal, but it’s a start. The Eemshaven terminal is expected to receive around 18 LNG shipments by December 31, according to Bloomberg.

Germany, which had become recklessly dependent on cheap natural gas from Russia and failed to build a single LNG import terminal as an alternative, is now adrift. It takes years to build a large LNG import terminal, which will not solve the current crisis. But the German government has chartered five FSRUs, three of which will enter service this winter. Private entities will charter two additional FSRUs.

Efforts to reduce consumption.

Germany has undertaken drastic efforts to reduce natural gas consumption by 20%, which includes just about anything from asking people to forego showers altogether, to taking showers cold, to close heated indoor swimming pools or to reduce the production of industrial users. Europe as a whole is aiming for a 15% reduction in its natural gas consumption.

Gas storages fill up.

In Germany, gas storage facilities are filling up at a record pace and are 87.9% full, according to data from Gas Infrastructure Europe. For the EU as a whole, storage facilities are 83.6% full, well above the 80% target set by the European Union.

Longer term….

Analysts have cited various reasons for the fall in futures prices, including the success over the past 10 days of the Ukrainian army’s counter-offensive, which has already liberated large parts of Ukraine from occupation. Russian. In terms of natural gas, we can hope that this war will soon be over, with Russia driven out of Ukraine, and that the energy relationship between Russia and Europe can then normalize again.

But I doubt Germany will simply return to the old normal. Germany’s vulnerability due to its dependence on natural gas on Russia, which dates back to the Cold War, has rattled the country. Germany has finally understood this and has finally embarked on the diversification of its natural gas supplies by building LNG import terminals.

Either way, this will mean that German consumers and industrial users will face much higher natural gas prices than two years ago, as high-cost LNG will make up a much larger share. of the mix, and low-cost natural gas by pipeline from Russia a much smaller share of the mix.

By the way: Russia cannot sell the natural gas at all that it did not sell to Europe because the gas pipeline network cannot be moved overnight and there are no facilities export of LNG linked to the production sites. Russia must therefore reduce production at these sites, and it loses the income from this production.

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Carol N. Valencia