2022 was an unprecedented year for many commodities, none more so than natural gas. TTF prices, the European benchmark, had already climbed significantly in late 2021 but then surged to record highs on the back of Russia’s invasion of Ukraine. The high prices were compounded in summer by a European-wide heatwave along with rampant purchasing to maximise storage ahead of the winter months. Since a steep decline during December, TTF prices have predominantly followed a downward trend in Q1 2023, sliding from €77.02 per megawatt hour on January 2nd to €42.40/MWH on March 21st, a level not seen since July 2021. Given the trauma inflicted on companies and consumers alike by energy prices over the last 18 months, it is worth noting some of the key factors that will affect natural gas prices going forward.
One factor that has weighed prices down is high levels of storage. As shown in the image below, EIA natural gas stocks for early March were at comparable levels to 2020 and higher than all of the other previous 4 years. This information is driving a significant bearish signal on ChAI’s 3 month price forecast for TTF prices. The unusually high storage is particularly strong in Europe where, as noted by ING, current storage capacity is around 56% full compared to an average of 36% for this time of year.
The high inventory levels in Europe stem both from a mild winter across the continent and a commitment from EU nations, signed last summer, to reduce their gas consumption by 15% between 1st August 2022 and 31st March 2023. Although the terms of the agreement, allowing EU members to decide “the measures of their own choice” by which to reduce their gas consumption, led to coal returning to the forefront of Europe’s short-term energy strategy, it was an undoubtedly crucial measure in ensuring there was sufficient gas supply for the winter.
On Monday 20th March, the European Commission proposed that the legislation to reduce gas consumption should be extended by 12 months to “avoid security of supply issues next winter.” While the passing of this extension is not yet confirmed, if it is approved it will continue to dampen natural gas demand in Europe, which has not yet recovered to previous levels, and therefore suppress prices.
Another one of the key factors driving European natural gas prices will be imports from Norway, which has replaced Russia as the primary supplier to the rest of Europe. The Scandinavian nation exported more than 120 billion cubic metres of gas to Europe last year as Russian flows dried up. This change in Europe’s gas supply chain also led to record profits for Norwegian energy companies, particularly Equinor and the state-owned Petoro. As the graph below shows, the weakening of the Norwegian Krone in 2023 has been inversely-correlated to the decline in natural gas prices. ChAI’s models currently interpret the currency as a key bullish driver for prices on a 12 month time horizon.
