European energy prices halted their dramatic slide as traders focused on risks that could tighten the market, even with historically warm weather keeping a lid on demand.
(Bloomberg) — European energy prices halted their dramatic slide as traders focused on risks that could tighten the market, even with historically warm weather keeping a lid on demand.
Benchmark natural gas futures settled 11% higher, reversing an earlier loss. While bearish factors prevail, supply can tighten as the Freeport LNG plant could face further delays to its restart, according to Rapidan Energy Group, a consultancy. Power prices also jumped.
Europe is poised for the warmest January in years, providing some relief from its energy crisis amid reduced Russian gas flows to the region. Still, prices for the fuel are higher than normal and the continent remains exposed to any further supply disruptions. Global markets for liquefied natural gas remain tight as Europe and Asia vie for cargoes.
Energy Crisis Isn’t Over Despite Enormous Drop in Gas Prices
“There are still plenty of risks around the remaining Russian supply and also the potential for increased competition for LNG from China, as the country drops its zero-Covid policy,” Warren Patterson, head of commodities strategy at ING Bank NV, said in a report. “Prices will still need to remain elevated to ensure demand destruction keeps the market in balance through the 2023-24 winter.”
Dutch front-month futures, the European gas benchmark settled at €72.42 per megawatt-hour after rising as much as 13% intraday. The contract on Wednesday settled at the lowest level since October 2021.
The UK equivalent contract also rose. German power for next month increased 8.4% to €175.96 per megawatt-hour.
“There is not so much room for gas to go down further at the moment,” said Graham Freedman, an analyst at consultancy Wood Mackenzie Ltd. “If gas prices keep going down, marginal LNG supplies could start diverting to Asia.” In addition, the use of gas in power would be on the rise, he said.
Freeport LNG may not restart after an explosion last summer for “several more months” due to extensive personnel training required, Rapidan said. Heather Browne, a spokeswoman for Houston-based Freeport LNG, said the company’s goal of reopening in the second half of January still stands. Still, the focus on the plant’s restart progress highlights the extent of nervousness on the market.
Easing Crisis
The recent gas price slump — a drop of almost 50% for the Dutch benchmark since the start of December — has helped to alleviate the crisis for European economies. In France, inflation unexpectedly slowed in December, while in Germany it eased more than anticipated.
Prices have declined so much lately that they are already close to a level to encourage gas — instead of coal — for electricity generation, according to EnergyScan, the market analysis platform of Engie SA.
If prices don’t rebound from the current levels, “it would mean that the gas market is really comfortable and that gas consumption for power generation can continue to increase,” the firm’s analysts said in a note.
Gas markets could tighten again this year as LNG supplies will be limited, with no new major export projects starting in the near term. Competition for cargoes with Asia could also increase.
–With assistance from Josefine Fokuhl and Todd Gillespie.
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