Are Europe’s falling gas prices here to stay?

Hello and welcome back to Energy Source.

First off, thank you for all the great responses last week on carbon capture and storage. The consensus among ES readers is that CCS will be needed as part of the decarbonisation drive, but still faces enormous hurdles to reaching the scale needed in the climate fight.

Today, we’re looking at the natural gas market. For the first time since Russia’s invasion of Ukraine there’s some good news on prices, which have been falling fast. Will it last? And in Data Drill, Amanda digs into China’s crude imports, where a fight for market share has broken out between Russia, which is largely locked out of western markets, and Saudi Arabia.

Also, Derek is in Washington DC this week for the North America Gas Forum and other meetings. Those in the capital should get in touch: derek.brower@ft.com.

Thanks for reading! — Justin

Good news on the natural gas front?

Natural gas prices are falling sharply on both sides of the Atlantic. It’s a sign that Europe is looking increasingly likely to avoid the worst-case scenarios in terms of energy supply this winter.

Here are some of the key price moves: The main European TTF benchmark price fell to €96.5 per megawatt hour, or about $27.40 per million British thermal units, in trading yesterday. That is down nearly 70 per cent from a high of more than €300/MWh ($85.40/mn Btu) in August and about half prices last month.

Liquefied natural gas prices delivered into the UK have fallen to roughly $22/mn Btu, the lowest since June. Those prices spiked to about $70/mn Btu in August.

The US Henry Hub price, meanwhile, was trading at about $5.20/mn Btu, half its high of $10/mn Btu in August.

These prices are still elevated compared to, well, when Russia had not yet cut off a large share of the world’s gas supplies.

But they are far below recent highs — and if they stay around these levels they would pose much less of a threat to the broader economy.

What’s behind the declines?

Weather has played an important role. Temperatures have been mild across Europe and the US over the past month, helping to hold down demand. At the same time, consumers and businesses have also tempered consumption in the face of sky-high prices. Europe has also been on a gas-buying binge over the past six months, hoovering up supplies off global markets that normally would have gone to Asia and elsewhere.

In Europe, inventories now sit at more than 93 per cent of capacity — a remarkable, if expensive, feat for European policymakers and industry. Mild demand and topped up storage has led to something of a short-term glut of supply, forcing loaded-up LNG tankers to queue off Europe’s coasts at the moment.

The US gas market has turned bearish as well after a scorching hot summer and surging demand for exports to Europe sent prices to multiyear highs. Prices have even fallen close to zero in west Texas, where natural gas supply has again expanded at a faster pace than pipelines can keep up with.

US exports are still running at full capacity, but producers have increased output at the same time household demand has tapered off, sending inventories back towards normal levels.

It’s all welcome news in a pricey gas market that, in recent months, has fuelled anxiety about more inflation as supply running dry amid freezing temperatures. The drop in prices also comes as European policymakers discuss a potential cap on prices.

The big question now is if the lower prices are here to stay. That is far from certain. Weather will be key; Europe’s bulging inventories could quickly be drained if temperatures plunge and Europeans are forced to crank up their heating. The same goes for the US, where the northeastern states, which rely on LNG imports, are particularly vulnerable to a supply crunch in a cold snap.

If storage is emptied out this winter, it could have severe knock-on effects for next year as the continued loss of Russian supply will make it difficult to restock inventories.

Russia’s president Vladimir Putin will also have his say. He has waged an energy war on Europe as part of the Ukraine conflict and will almost certainly try to keep the pressure on Europe’s economy by continuing to squeeze supply and keep prices high. — Justin Jacobs

Data Drill

China is snapping up cheap Russian oil, offsetting western efforts to punish Putin for his war in Ukraine.

Chinese imports of oil from Russia are up 22 per cent year-over-year while its imports from Saudi Arabia are down 5 per cent, according to new data from China’s General Administration of Customs.

Russia is challenging Saudi Arabia for its long-held spot as Beijing’s top oil supplier. Last year Riyadh supplied 58mn more barrels of oil to China than the Kremlin. As of September, Saudi Arabia’s gap with Russia has closed to a 12mn barrel surplus.

Since Moscow’s invasion of Ukraine, Russian oil has traded at a steep discount, attracting countries such as China, the world’s largest importer, and India to increase purchases of the fuel now partly sanctioned by western countries.

In addition to increased imports from Russia, Chinese oil imports from Malaysia have jumped 128 per cent year-over-year, according to yesterday’s customs data. Many analysts have speculated that Chinese traders could be relabelling oil shipments from US-sanctioned countries such as Iran and Venezuela to avoid backlash.

The customs data also show Chinese imports of Russian liquefied natural gas are up 33 per cent year-over-year, despite overall shipments of the commodity falling 11 per cent. While the agency no longer reports pipeline gas supply figures by country, payments for Russian gas have more than doubled year-over-year. (Amanda Chu)

Power Points