European natural gas prices have surged to their highest levels of 2024, driven by a confluence of factors including supply concerns and slower-than-expected storage builds.
Despite storage levels being relatively comfortable across the continent, fears of disruptions in Russian fuel supplies crossing Ukraine have further fueled the rally, with benchmark futures trading above €39 per megawatt-hour in early August.
The ongoing conflict in Russia’s Kursk region, home to a crucial gas intake point, has heightened these concerns, causing prices to spike for a third consecutive day.
Supply concerns push prices higher
The recent price surge has been largely attributed to fears of disruptions in the flow of Russian gas through Ukraine.
On Thursday, Russian energy giant Gazprom PJSC announced that gas transit via the Sudzha intake point—Russia’s last remaining pipeline route to Europe via Ukraine—was set at 37.3 million cubic meters per day, down from the usual 42 million cubic meters observed in recent months.
The Sudzha station, located near the border, is a critical point for gas flows to Europe, and any potential disruption could have significant implications for European energy markets.
While gas flows at the Sudzha transit point are continuing for now, the slight reduction has raised alarms, particularly as intense fighting continues in the region.
Analysts warn that any further escalation could threaten the stability of gas supplies to Europe, pushing prices even higher.
Sluggish storage builds amid high Asian demand
Despite European Union (EU) natural gas storage levels being over 86% full as of August 6—well above the five-year average of 78%—storage builds have been slower than anticipated.
This slowdown is primarily due to lower liquefied natural gas (LNG) inflows into Europe, as strong Asian demand has diverted cargoes away from the continent.
Asian LNG demand has remained robust throughout 2024, with imports rising by 10.3% year-on-year in the first seven months of the year.
China and India have been the primary drivers of this growth, accounting for 64% of the increase in demand.
The higher demand in Asia has ensured that the Japan Korea Marker (JKM) has consistently traded at a premium to the Dutch Title Transfer Facility (TTF), Europe’s leading gas hub, making it more profitable for LNG cargoes to head to Asia instead of Europe.
Warren Paterson, head of commodities strategy at ING Think, said,
“The decelerated storage build-up is expected to support TTF prices. However, projections still suggest that EU storage will likely be near 100% full heading into the 2024/25 winter, provided there are no significant supply shocks.”
Source: Tradingview
Norwegian pipeline maintenance
Norway, which has overtaken Russia as Europe’s top pipeline gas supplier since the start of the Ukraine war, is expected to reduce its gas flows to the EU in August and September due to scheduled summer maintenance.
Analysts caution that any overruns in maintenance could further tighten the market, potentially leading to increased LNG imports into the EU to compensate for the shortfall.
Norwegian gas flows have become increasingly vital to the European market, and any reduction in supply could exacerbate the existing supply-demand imbalance, pushing prices even higher as the continent approaches the winter heating season.
Ukraine transit route
The future of Russian pipeline gas flows via Ukraine remains uncertain, with Ukraine indicating that it does not plan to extend its transit deal with Gazprom when it expires at the end of this year.
This has added another layer of complexity to the already volatile market, as the EU looks for alternative supply sources.
EU Energy Commissioner Kadri Simson has assured that alternative supply routes are available, with Austria able to import gas from Italy and Germany.
However, analysts note that the market will remain sensitive to any developments related to these flows, as evidenced by the recent price spike following reports that Ukrainian troops had captured the Sudzha entry point.
Speculative activity
Despite the relatively comfortable storage levels, speculative activity remains a key factor driving market volatility.
According to energy analyst Paterson, speculators are “stubbornly bullish” on the European natural gas market, holding a sizeable net long position—the largest since 2021.
As of the latest positioning data, investment funds hold a net long of almost 192 TWh, a significant increase from the net short positions at the start of 2024.
Paterson also highlighted that Asia is expected to remain the dominant driver of global gas demand growth, a trend that is unlikely to change as economies in the region transition towards cleaner fuels. This continued demand from Asia, coupled with the ongoing geopolitical risks in Europe, suggests that natural gas prices may remain elevated in the coming months.
Source: ING Research
As Europe heads into the winter heating season, the combination of supply uncertainties, strong Asian demand, and speculative activity is likely to keep natural gas prices volatile.
While storage levels provide some cushion, the market remains on edge, with any further disruptions or demand spikes potentially leading to significant price increases.
Investors and policymakers will need to closely monitor these developments to navigate the challenging energy landscape in the months ahead.
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