Mild winter conditions could help lower high natural gas prices

ANKARA

There are already signs that natural gas storage levels are steadily rising and a price decline may be in sight unless there is a colder-than-expected winter, according to Stephen O'Sullivan, a senior visiting research fellow at the Oxford Institute for Energy Studies.

O'Sullivan told Anadolu Agency that gas prices are rising globally for a number of reasons but the reasons can be explained in the context of a competitive market responding to these factors with price changes helping to solve the problems.

"Prices are high. They have rarely been this high in the UK, for example, in the last quarter-century. We have seen both demand and supply problems impact prices. We saw high Asian demand early in the year because of cold weather as well as lower hydroelectric production in South America. Together, these diverted gas supplies (in the form of liquified natural gas) away from Europe," O'Sullivan said.

He added that there were technical issues at LNG export terminals which supply Europe and in European gas fields.

According to O'Sullivan, European stocks of natural gas have, therefore, been unusually low as winter approaches and this has prompted price rises on the basis that gas demand could exceed supply, particularly when people remember that last winter was unusually cold.

"The market for natural gas is increasingly global and Europe is not immune to changes in demand in Asia or changes in supply from Russia – and there certainly does seem to have been lower than expected pipeline supplies from Russia to Europe which has affected Europe’s ability to increase the amount of gas that it has in storage. However, storage is now beginning to fill up again and if winter is reasonably normal the worst may be over," he explained.

Switch to alternative fuels

O'Sullivan said there will be more supply in the market as new LNG export plants are expected to start up in the US and the Nord Stream 2 pipeline from Russia to Germany should start deliveries in 2022.

He said that on the demand side, if gas prices in Europe remain high, some large gas consumers may have to switch away from gas and use alternative fuels, or even shut down for a period of time until prices fall.

O'Sullivan added that the current level of prices could be maintained but equally, gas prices could decline if temperatures stay at reasonable levels and gas stocks continue to rebuild since the unusual increases in demand at the beginning of this year are unlikely to recur.

Despite the general perception that there is a crisis in the markets at the moment, he said: "The pricing mechanism is working, higher prices reduce demand and encourage supply. We could call it a crisis if there were forced cutoffs of gas supply which could not be replaced by alternative sources of energy. What we have seen are high gas prices - which is what we would expect to see if supply is reduced and demand rises."

European natural gas prices surged by 600% compared to September 2020, reaching over €90 (around $104) per megawatt-hour for November delivery in the Dutch Title Transfer Facility (TTF).

After reaching a record high of €160 per megawatt-hour for November delivery on Oct. 6, the price on Thursday is around €90 per megawatt-hour in the Dutch TTF.