How does geopolitics affect natural gas prices?

Geopolitical events around the world have sparked concerns about gas prices, recalling 2022 when Europe worried about relying on Russian gas supplies. However, media sensationalism often outpaces concrete evidence of real problems. How do the conflicts in Israel, the Houthi militias attacks, and the ongoing war between Russia and Ukraine impact the gas market, particularly in Europe? How is the U.S. market faring, given its recent record-breaking cold weather?

Europe has a robustly diversified gas supply.

The conflict between Israel and Hamas has had a minimal impact on actual gas flows worldwide. While Israel is an important gas producer in the region, and there was once consideration for an offshore gas pipeline to southern European countries, the conflict has fostered an environment conducive to Houthi militants targeting merchant ships traversing the Red Sea to the Suez Canal. Escalating attacks have prompted many carriers to reroute supplies, diverting much of the oil and gas around Africa, significantly increasing delivery times and costs. It's worth noting that before the conflict, around 8% of all LNG trade utilized the route through the region.

Regarding the U.S. market, while recent record cold weather has placed pressure on demand, the country's domestic gas production has remained resilient, helping to mitigate price spikes. Moreover, U.S. LNG exports have increased, contributing to global gas supply.

Geopolitical events have raised concerns about gas prices, but their impact on the European gas market may be limited. The United States currently supplies around 50% of LNG to Europe, and this share is expected to increase in the second half of 2024 with new export capacity coming online. In addition, Europe relies on pipeline gas supplies from Norway, Algeria, and Azerbaijan, while Russia's role has diminished. Furthermore, LNG gas that was initially intended to reach Europe via the Suez Canal is being rerouted, albeit at an increased cost and with longer delivery times.

Europe has sufficient gas reserves to meet its current and likely next winter's needs.

The mild autumn and early winter in Europe delayed the start of the heating season, which can be attributed in part to climate change. However, Europe has taken steps to diversify its gas supplies and has started building reserves earlier for the heating season. Currently, storage facilities in Europe are 72% full, compared to a 5-year average of 62%. At the end of the current heating season, storage levels are expected to exceed 50%, ensuring a partially provisioned supply for next winter. This scenario is reflected in the gas market's forward price curve. The price of TTF gas for delivery to Dutch ports is expected to remain relatively stable until early autumn 2024, with marginally higher prices for the winter period next year. While gas prices remain slightly elevated compared to pre-pandemic levels, there is little indication that they will return to the exorbitant levels of €100, €200, or even €300 per MWh observed during the height of the pandemic, the war in Ukraine, and inflation.

While geopolitical events have raised concerns about gas prices, the European gas market appears to be well-positioned to manage supply disruptions and maintain stable prices. The United States, a major natural gas producer and exporter, is also expected to maintain its role in stabilizing the global gas market, even as demand from Asia, especially China increases.

Of course, in the event of a prolonging harsh winter or reduced gas imports from the United States, gas prices might rise in Europe, but global gas market projections suggest that the market will remain balanced overall. The US. gas market's supply surplus is currently significant, with gas inventories around 10% higher than the 5-year average and 13% higher than a year ago. Inventories are expected to reach 20-25% above the historical average by the end of the heating season, potentially creating the largest supply surplus in history.

Despite this surplus, spot gas prices in the U.S. can fluctuate significantly depending on seasonal demand patterns. Freezing snaps can drive up spot prices by several hundred percent in key heating regions, even though futures prices remain relatively stable. The current overproduction relative to demand is expected to keep overall gas prices low in the US. Curtailing production is not cost-effective, as restarting it can be expensive. Therefore, it is more economical to extract and store gas for potential future supply disruptions, which leads to pushing current prices even lower.

Overall, while geopolitical tensions could pose challenges, the global gas market appears to be resilient and well-supplied. The U.S., with its vast gas reserves and growing export capacity, is well-positioned to play a stabilizing role in the market, even as global demand increases.

What's next for prices in Europe and the US?

While the geopolitical landscape continues to evolve, the overall trend for gas prices in Europe and the US is expected to remain downward. The disparity between US and European gas prices is likely to slightly narrow as new export capacity in the U.S. comes online, increasing supply to Europe and Asia. Currently, natural gas prices in Europe are hovering below €30/MWh and are expected to remain stable until early autumn. While the market anticipates a slight increase for the winter period to around €35/MWh, the influx of gas from the U.S. in the second half of the year could push prices down even further, potentially below €20/MWh. However, continued geopolitical tensions could disrupt this trajectory.

In the US, gas prices are also expected to decline, potentially reaching a real low of around $1.5-2.0/MMBTU before rebounding in the summer and then the autumn/winter season. Investors should note that a significant portion of the expected price increases in the second half of the year will stem from the structure of forward prices and following rollovers.

Despite these downward trends, gas remains an essential commodity for almost every economy in the world. However, the recent period of market elevated volatility seems to be subsiding, indicating that prices are stabilizing after years of turbulence.