European Gas Spot Price Down Due to Warm Weather, Vast LNG Supplies

Europe’s warmer-than-usual weather this autumn and large additional supplies of liquefied natural gas (LNG) have led to a significant drop in Title Transfer Facility (TTF) spot prices recently, Fitch Ratings says. Regulatory proposals to limit gas price levels in the EU that market participants expect to be agreed shortly may also affected the prices. However, we anticipate that prices may continue to be volatile, particularly when the weather turns colder during winter months, and have kept our gas price assumptions unchanged.

The TTF spot price has declined fourfold to USD22/thousand cubic feet (mcf) in October from its peak of USD88/mcf registered in late August, but is still well above its average of USD7.9/mcf in 2018-2021. Moderate gas consumption due to warm weather and significant LNG supplies helped to fill gas storage facilities (EU gas storage is 92% full), weighing on spot prices. However, the recent large spread between the spot and one-month forward prices suggests market expectations of higher prices once temperatures fall.

The European Commission’s (EC) proposals targeting the reduction of high energy prices is an additional factor putting pressure on gas prices. Those proposals include joint purchases of natural gas by EU states, creating a new LNG price benchmark, limiting price volatility on the TTF gas exchange and setting solidarity rules in case of supply shortages.

The recent EC proposals include only a temporary price correction mechanism to prevent extreme price spikes, rather than a more sustained price cap that was proposed by some member states and that could have affected the attractiveness of the European market for alternative gas supplies. This mechanism may be easier to agree with countries that oppose the gas price cap. It will also give consumers an incentive to reduce gas consumption further, which could be difficult to achieve if the price cap is introduced and set at a relatively low level, and help maintain LNG supplies to the region.

European spot gas prices have been highly volatile since the heightened tensions between Russia and Ukraine prior to the outbreak of war in February. Prices will be further affected by weather patterns this winter, potentially resulting in persistent volatility.

The EU increased LNG imports by almost 70% in 9M22 yoy. Higher European spot prices compared to those in Asian markets have helped Europe to secure additional supplies. Lower demand in China due to weaker economic growth and lockdowns also helped to redirect supplies to Europe, sometimes leading to oversupply on certain routes. Spanish gas network operator Enagas announced this week that it would limit the number cargoes it handles in its system due to ongoing large supply volumes, while industrial demand is relatively low and storage utilisation levels are high.

Fitch Ratings-Warsaw/London-20 October 2022: Europe’s warmer-than-usual weather this autumn and large additional supplies of liquefied natural gas (LNG) have led to a significant drop in Title Transfer Facility (TTF) spot prices recently, Fitch Ratings says. Regulatory proposals to limit gas price levels in the EU that market participants expect to be agreed shortly may also affected the prices. However, we anticipate that prices may continue to be volatile, particularly when the weather turns colder during winter months, and have kept our gas price assumptions unchanged.

The TTF spot price has declined fourfold to USD22/thousand cubic feet (mcf) in October from its peak of USD88/mcf registered in late August, but is still well above its average of USD7.9/mcf in 2018-2021. Moderate gas consumption due to warm weather and significant LNG supplies helped to fill gas storage facilities (EU gas storage is 92% full), weighing on spot prices. However, the recent large spread between the spot and one-month forward prices suggests market expectations of higher prices once temperatures fall.

The European Commission’s (EC) proposals targeting the reduction of high energy prices is an additional factor putting pressure on gas prices. Those proposals include joint purchases of natural gas by EU states, creating a new LNG price benchmark, limiting price volatility on the TTF gas exchange and setting solidarity rules in case of supply shortages.

The recent EC proposals include only a temporary price correction mechanism to prevent extreme price spikes, rather than a more sustained price cap that was proposed by some member states and that could have affected the attractiveness of the European market for alternative gas supplies. This mechanism may be easier to agree with countries that oppose the gas price cap. It will also give consumers an incentive to reduce gas consumption further, which could be difficult to achieve if the price cap is introduced and set at a relatively low level, and help maintain LNG supplies to the region.

European spot gas prices have been highly volatile since the heightened tensions between Russia and Ukraine prior to the outbreak of war in February. Prices will be further affected by weather patterns this winter, potentially resulting in persistent volatility.

The EU increased LNG imports by almost 70% in 9M22 yoy. Higher European spot prices compared to those in Asian markets have helped Europe to secure additional supplies. Lower demand in China due to weaker economic growth and lockdowns also helped to redirect supplies to Europe, sometimes leading to oversupply on certain routes. Spanish gas network operator Enagas announced this week that it would limit the number cargoes it handles in its system due to ongoing large supply volumes, while industrial demand is relatively low and storage utilisation levels are high.

The EC reported that natural gas demand in Europe in August and September is 15% below the five-year average level, which is consistent with the EC target for reduced gas consumption. We note that EU industrial consumption decreased considerably over the summer months due to capacity curtailments and plant closures in some sectors (such as fertiliser production) as such production capacity is loss-making due to high energy prices.
Source: Fitch Ratings