European natural gas rallied as traders try to balance the impact of a warm winter with the need to keep prices high enough to sustain LNG imports.
Benchmark futures gained a whopping 7.9% in a volatile trading session. Unusually mild weather has dampened heating demand and kept inventories higher than normal. But there is concern that the resulting price drop — down about 50% over the past month — could prompt liquefied natural gas shipments to go elsewhere.
While Europe has so far made it through an unprecedented energy crisis that has fueled inflation, much of the winter remains. LNG imports have been key to replacing some gas supplies amid reduced flows from Russia, but lower prices mean it’s already more profitable for US sellers to ship cargo to Asia in February and March – especially when there’s a cold snap.
“If cargo is diverted, a significant amount of baseload volume is missing, which naturally undercuts price levels,” said Simone Turri, head of structured trading in Western Europe at Swiss energy trader MET International. “Eventually, Europe will need to attract LNG cargoes later this year to replace Russian supplies.”
European and Asian prices tend to align as the two regions compete for the same LNG pool. Spot LNG prices in North Asia rose on the prospect of colder weather from China later in the month.
Cheap gas could also boost energy demand in Europe again, which politicians want to avoid. For European industry, lower prices mean some factories can resume operations, Turri said. But a looming recession would “limit the pick-up in demand,” he added.
“Market participants believe that the European gas balance is not comfortable enough to afford a significant increase in gas demand for power generation, especially since the price drop could also trigger a restart of industrial demand,” EnergyScan, Engie SA’s analytics platform, said in a daily note.
Meanwhile, the UK is receiving less LNG due to bad weather delaying offloading at Milford Haven, where two import terminals are located. Feeding into the grid from these plants is now at its lowest level since October.
Still, by and large, the supply is plentiful for the time being. Norway’s gas flows to Europe rose to their highest levels since April as nations like Germany rely on the Nordic nation to fill in the gaps left by Russia’s absence. Above-average temperatures are forecast until at least mid-February.
Dutch front-month futures, the European benchmark, rose 7.1% to €74.50 per megawatt-hour as of 5:12 p.m. on Jan. 9 in Amsterdam. The corresponding UK contract gained 8.2%.
Prices used to fluctuate after a ship that ran aground in the Suez Canal was refloated. Traffic on the waterway vital to LNG trades from Qatar to Europe was only briefly disrupted, with only minor delays now expected.
