Europe's natural gas benchmark, Dutch TTF gas futures, has surged to its highest level in nearly four years. EU gas storage inventories stand at roughly 75%, the lowest for this time of year since records began in 2011. If winter temperatures are low, Europe's liquefied natural gas demand will rise, intensifying competition with the Asian market and pushing prices even higher.
European natural gas prices continue to climb, with domestic storage inventories dropping to historic lows, and the market is once again worried that winter will bring a natural gas price shock. On Friday, Dutch TTF natural gas futures for December delivery rose 4.9% to 102.78 euros per megawatt-hour (equivalent to 115 US dollars), after the contract had already broken through the 100-euro mark on Wednesday. Data from Trading Economics shows that this European natural gas benchmark contract has gained about 36% this month and 256% so far this year. Friday's rally pushed European natural gas prices to a nearly four-year high. The last time such a market appeared was in 2022, when Russia's invasion of Ukraine triggered an unprecedented natural gas crisis in Europe. On December 5, 2022, Dutch TTF futures hit 139 euros per megawatt-hour; in August of the same year, they briefly soared to 339 euros per megawatt-hour.
While winter temperature risks loom over European natural gas supply and prices, warnings keep emerging that Europe is not prepared for a cold winter. This summer, Europe suffered heatwaves, compounded by the El Nino extreme climate phenomenon, disrupting energy supply and demand. Shipping disruptions in the Strait of Hormuz dragged down Europe's gas storage refilling work throughout the summer, and European natural gas storage inventories now stand at only 75%, the lowest for this time of year since records began in 2011. Analysts at BlackRock said in an October 27 research note: inventories are already stretched thin, and if a cold winter hits, European energy prices, which have already surged 170% this year, will climb even further. Natural gas accounts for about one-sixth of the EU's total power generation energy.
Europe is pinning its hopes on an unusually warm winter. Peter Taylor, head of commodity strategy at Macquarie Group, said Europe is essentially betting that this winter will be warmer, and that expectation is tied to the El Nino climate event. But Taylor also noted that historically, in the UK and continental Europe, years when El Nino occurred have often instead seen severe cold snaps. Speaking to media including this outlet at an October commodities roundtable, Taylor said: "The risk is that the winter is either mild or severe. The current situation is that Europe can only get through this winter safely if the winter is warm enough." "Once severe cold weather appears, Europe will compete with Asia for natural gas supplies, which will bring enormous upward pressure on prices."
Compared with the United States, which has domestic shale gas and liquefied natural gas production capacity, Europe and most of Asia are more vulnerable to natural gas price shocks. BlackRock said: "The impact of the energy shock is uneven. We estimate that the energy shock has already shrunk Europe's GDP by about 0.5%, while the US has fallen only 0.1%. The gap between the two may widen further."
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