Gas prices fall, but problems are ‘far behind us’

Published on:

After falling below 100 euros per megawatt-hour (MWh) earlier in the week, the price of European gas continued to fall on Tuesday, returning to levels posted last June. However, its price remains twice as high as at the beginning of the year and severely penalizes the industry of the old continent. Explanations.

The price of gas is back below the symbolic threshold of 100 euros per megawatt hour (MWh), i.e. three times cheaper than at the peak observed last summer. The continuous decline for several weeks was confirmed on Tuesday, October 25, when the Dutch TTF futures contract, the market for senders and buyers that acts as a benchmark for natural gas prices in Europe, traded at 93.50 euros.

“We are coming from a period when prices were at levels we would never have imagined, levels linked above all to the Ukrainian conflict and the violent economic recovery after Covid in 2021,” explains Raphaël Trotignon, responsible for the energy division. -Climate for Rexecode.

“Gas prices, like oil prices, are based on the balance between supply and demand. But today, demand is weak, especially due to the exceptionally mild temperatures in October, while supply is abundant with full tanks, which also creates logistical problems.” ”, explains consultant Nicolas Meilhan, engineer and energy specialist.

From the fear of running out to running out of gas

After fear of shortages linked to Vladimir Putin’s energy war, Europeans today have gas they don’t know what to do with. As of October 19, the EU filled its stocks by almost 93%. LNG (liquefied natural gas) storage, which has exploded in demand as winter approaches to replace Russian gas, is saturated.

The result: LNG carriers have to circle in the water while they wait to unload their tanks. Last week, more than 35 ships were on standby around the Mediterranean and in Spain, still the best-equipped country in Europe with six LNG terminals. “A completely exceptional situation,” traders and operators told Reuters.

>> To read on Lower gas prices, Goldman Sachs and its mysterious contradictory predictions

At the same time, European individuals rarely use heating since the beginning of autumn due to very high temperatures for the season. In France, October 2022 could even become the hottest on record.

The drop in gas consumption is particularly striking in Germany, where it fell by 21% over the last three months compared to the same period in 2019.

Industrial activity at half mast

On the other hand, there’s no point in hoping that your energy bill will go down next month. European households benefit from price shields and already pay much less for gas than its actual price. As for companies, they sign long-term contracts. Therefore, only groups that are currently renegotiating their contracts could benefit from this situation.

While the reduction in gas prices may appear to be good news for the EU27, its price is still twice as high as at the start of the year, forcing companies to produce less in the context of an economic slowdown.

>> Read also: Recession in Europe in 2023? Gloomy OECD forecasts

“High gas prices and the government’s sobriety guidelines led producers to lower consumption. Some were even forced to stop production, especially in sectors that use a lot of gas,” recalls Nicolas Meilhan. “In Europe, 50% of the total aluminum production capacity was lost and 70% of fertilizer production was stopped or slowed down,” says the expert.

In France, Duralex, the famous glass manufacturer, recently announced the shutdown of its production furnace at the Chapelle-Saint-Mesmin (Loiret) plant from 1Yippee November for a period of four months.

Raphaël Trotignon notes that “this shock to energy prices is quite targeted at Europe and unfortunately it is a monstrous lack of competitiveness compared to the United States”, where gas prices are five times lower.

Warm winter and after?

In any case, this situation puts grist in the mill of Germany, which opposes the gas price cap demanded by France. Why cap prices at the risk of a movement of concern among suppliers when prices fall?

The issue is expected to be at the heart of a meeting between French President Emmanuel Macron and German Chancellor Olaf Scholz scheduled for Wednesday in Paris.

>> Also read: Energy, warplanes, anti-missile shield: Franco-German pair in turmoil

Last Friday, European leaders approved a plan to reduce energy costs, but finding mechanisms that work for all member states will be difficult.

In the meantime, the 27 agreed on several main principles: to promote joint purchases or even to “accelerate negotiations” with “reliable” producer countries such as Norway and the United States.

Although gas prices have been trending lower in recent weeks, markets remain highly volatile and as the conflict in Ukraine unfolds, supplies are not guaranteed in the medium term.

“The gas problem is still far behind us,” warns Raphaël Trotignon. “This year, we were able to fill our reservoirs in large part thanks to Russian gas before major supply disruptions. But the question is more for the coming winters. Will we be able to replenish supplies without all of Russia?”

Leave a Comment