Status: 04/01/2022 4:10 p.m
Prices on the energy markets have risen massively in recent months. The development in the case of natural gas is particularly dramatic. Looking ahead to the coming winter, some people get scared and anxious – rightly so?
Natural gas was cheap for many decades, but the price has not only risen dramatically since the start of the Ukraine war. Because already in the months before the armed conflict, Russia reduced its gas supplies to the contractually agreed minimum; unlike in the past, the country no longer sold natural gas on the so-called spot market, the market for very short-term deliveries. The consequences are still visible today: low levels in the gas storage facilities in Western Europe and significantly higher prices than usual.
In the Netherlands the price is made
But what condition is the European natural gas market actually in? Information is provided by the so-called “Title Transfer Facility”, or TTF for short. This is a virtual trading point in the Dutch gas network through which natural gas for the Netherlands is traded on the futures exchanges in London and Chicago. This is used by market participants in many European countries regarded as a so-called reference market.The prices that form there are often the basis for natural gas prices in other European countries as well – no wonder, since they are connected to one another via their gas pipelines.
This pricing reflects the expectations of all market participants who trade the TTF futures contracts. An important part of this consists of professional market participants who are not active on the market for reasons of speculation, but for reasons of hedging and the associated better ability to plan. These include, on the one hand, natural gas producers who sell their products forward; on the other hand, there are consumers of natural gas such as energy groups or industrial companies who want to secure their requirements in advance at fixed prices in order to have planning security.
Winter no more expensive than summer
Around a week and a half after the start of the Ukraine war, panic reigned on the market, and the price of natural gas that was available at short notice jumped to unprecedented heights. Only at around 350 euros per megawatt hour did the market turn down again.
In the meantime, the price for short-term available natural gas has leveled off in the range of 100 to 130 euros per megawatt hour – still a lot compared to previous years, but significantly less than the maximum prices. Prices are also in this range for the remaining spring and summer months, although natural gas consumption, particularly in the building sector, will fall in the coming months due to the sharp drop in heating loads. Apparently, the market is assuming that natural gas demand will remain high, for example in order to replenish the European natural gas storage facilities, which by historical standards have only been sparsely filled.
In the case of natural gas quotations for the coming winter, a slightly lower price is currently being quoted than for the upcoming summer months. The market is therefore assuming that the supply for the coming heating period will not be exactly plentiful, but will not be extremely scarce either.
Save more, deliver more
On the one hand, the market is apparently assuming that the current discussion about paying for Russian natural gas deliveries in rubles will at least be satisfactorily resolved and that a comprehensive stop to deliveries from Russia is not imminent.
On the other hand, market participants may assume that demand will also fall; for example through savings measures, for example by replacing natural gas in electricity production with lignite and hard coal. After all, around 14 percent of the natural gas in Germany was converted into electricity in 2020 – so the savings potential in this area is enormous. On the other hand, additional shipments of liquefied natural gas (LNG) to Western Europe also appear likely.
The natural gas market remains tense, but there is currently no sign of panic with regard to the coming winter. Of course, the current prices do not yet include new tricks of the Kremlin that are possible at any time.