(Finance) – European gas prices have increased by 14% in the last two weeks, reaching 50 EUR/MWh this week, the highest level in over a year. While the biggest headline this week in natural gas was the disruption of residual flows of Russian gas through Ukraine, the The main factor tightening northwestern European gas fundamentals this winter is colder weather than average currently expected for the next two weeks, aided by low wind power and Norwegian production outages seen in December. Analysts say so Goldman Sachs in research on the topic.
If this cold prediction comes true without other compensation, the investment bank calls significant risks that TTF prices will reach a level where it becomes profitable to switch to oil in a range of 63-84 EUR/MWh in the coming months, well above the 2025 TTF base case of 40 EUR/MWh under average weather conditions, to help manage European gas storage.
It is pointed out that the interruption of Russian gas flows from 42 mcm/day to zero from 1 January represents a net narrowing of north-western European gas balances in the order of 16 mcm/day (2.7 % of expected demand for 2025 in the region). “To be clear, while northwestern Europe was not receiving any of that gas, we expect theAustria relies on pipeline imports from Germany to cover its gas demand and potentially on additional marginal flows to complement the needs of Slovakia“, the document reads.
According to Goldman Sachs, a “more significant and surprising tightening factor in January gas balances is the much colder than average temperatures currently forecast for northwestern Europe for the next two weeks, more than 4°C below the ten-year average. If realized, we estimate that such low temperatures would increase gas demand in northwestern Europe by more than 100 mcm/day in January.”
In any case, analysts rate the risks of a stockout as “very low”, even with such a cold weather forecast. The main challenge for Europe is that the lower the storage levels at the end of March, the the more difficult it will be for the region to supply itself before next winter. Notably, under the colder-than-average scenario currently expected and assuming no offsets elsewhere on the balance sheet, Goldman Sachs estimates that end-March 2025 inventory levels will fall to 30% (compared to 35% under average weather conditions). This would bring end-October 2025 storage levels to the low 80s (compared to high 80s% under average weather conditions), well below the EU requirement of 90%.
More specifically, it is estimated that this scenario would create a deficit of 21 mcm/d in the market during the summer of 2025 (compared to the EU target of 90% full storage). Considering that European gas prices are already well above coal generation costs, the next source of demand substitution is the switch from gas to oil (G2O), in a range between 60 EUR/MWh (fuel oil) and 78 EUR/MWh (distillate fuel). During the 2022 European energy crisis, the shift from G2O in industrial applications peaked at 24 mcm/day. In this higher TTF scenario, the expectation is that incremental LNG will be delivered to Europe (competing with Asia). As well as further changes in European weather forecasts, key drivers to watch include weather forecast for Asia northeastern and the increase of the upcoming additions of liquefaction capacity in the United States.