The natural gas war premium is gone

Welcome to the first Energy Source of 2023! Energy markets have started the new year sliding on warm winter weather and fears that recession is coming for swaths of the global economy. Brent crude prices yesterday closed at $77.84 per barrel, down 5 per cent.

Today’s focus is on natural gas markets, where the fall in prices in Europe has wiped out 2022’s war-driven gains. Has the much-feared winter energy crisis been averted? And in Data Drill, Derek looks at how Russia’s state-owned energy companies (and other countries’ government-backed oil firms) have missed out on the market rally while their western rivals have soared.

Thank you for reading and we look forward to another great year here at Energy Source. — Justin

Gas market calm amid the energy war

When Russian president Vladimir Putin cut off gas supplies to Europe last year, launching an unprecedented energy war on the continent, he hoped to engineer a winter crisis that would break the west’s support for Ukraine.

The winter is not going that way. Unseasonably warm weather, cuts in fuel use and a concerted effort to stockpile natural gas have sent prices across Europe plunging in recent days, wiping out the war-driven gains in 2022 and easing fears of an economically damaging energy crisis.

Prices for Dutch TTF, the main European benchmark, fell yesterday to around €64.20 per megawatt hour (that’s equivalent to around $20 per million British thermal units), the lowest level since November 2021. That is down more than half from highs in December and about 80 per cent lower than the all-time highs last summer.

Prices are still elevated compared to historic norms but the winter that many feared, of Europeans suffering heating and electricity shortages amid freezing temperatures and paying extreme energy costs, looks, mercifully, unlikely.

It’s not just Europe. US natural gas prices, which have been elevated but nowhere near Europe’s shockingly high levels, have also fallen to their lowest in nearly a year, trading yesterday at around $4/mn Btu. US prices spiked to more than $10/mn Btu last summer, the highest of the shale era, as the energy crisis spiralled and high fuel costs fanned decades-high rates of inflation.

Liquefied natural gas prices in Japan, South Korea and China, the other major corners of the global market, have also followed lower.

Among the most remarkable data points is how full European gas storage has remained into January — a sign that last year’s costly natural gas buying binge is paying off (with a little added luck on the weather front).

Data from Gas Infrastructure Europe shows EU-wide storage levels at around 83 per cent, among the highest levels ever for this time of year. The recent warm weather has even allowed rare wintertime increases in storage levels in the first few days of the new year. Storage levels are even higher in key European economies like Germany (91 per cent) and potential conflict flashpoints like Poland (97 per cent).

That is important for two reasons. Most immediately, high storage levels, and the continued flow of liquefied natural gas imports, leave Europe in a strong position to respond to rises in demand if and when temperatures plunge later this winter.

It also leaves European countries in a stronger position to plan for next winter, which industry executives and analysts have warned will be at least as treacherous as this year.

The higher storage levels that are coming out of this winter, the less restocking European buyers will have to do in the following months, which would ease the pressure on prices for the rest of the year. It was the European LNG shopping spree last summer that helped drive global natural gas prices to record highs.

Does all of this mean Europe is in the clear? No. Prices will probably have to remain higher than in past years in order to keep high levels of LNG from the US, Qatar and other places flowing into the continent and to hold down demand. Putin also still has some gas flowing into Europe that he could cut off to try to put more pressure on Europe. However, that strategy has not paid off so far and would inflict more economic damage on Russia itself.

But last year’s chaos now looks less likely to repeat itself than it did a couple months ago. That’s good news for Europe’s energy security and economy. (Justin Jacobs)

Data Drill

Invading your neighbour and demolishing your most important customer base do not please investors in your state energy champions. Rosneft and Gazprom, the Kremlin-controlled oil and gas companies, once projected Russia’s energy prowess. But after Moscow’s decision to slash natural gas exports to Europe in the past 18 months, president Vladimir Putin’s decision to invade Ukraine last February, and the onset of deep sanctions on Russian energy, investors have punished the two groups.

While Rosneft’s and Gazprom’s share prices have languished since the start of 2022, the stock of western producers such as ExxonMobil has risen steeply. Exxon’s market valuation hit a record high of more than $470bn last year. Gazprom, which once claimed it would be the first trillion-dollar company and whose gas coursed through Europe’s economy, is currently worth just over $50bn, according to Refinitiv — less than Monster Beverages, the energy drink you tell your kids to avoid.

Shell has fared better than Russia’s two producers. So has Saudi Aramco — even though the kingdom’s oil and gas company has far underperformed western rivals, rising initially with oil prices last year but now worth less than it was 12 months ago. Aramco wasn’t the only underperformer: shares in Brazil’s Petrobras have slid hard in recent months.

Power Points

• The Lex column on how warm weather is chilling the outlook for US gas drillers.

• Chinese battery makers are strengthening their grip on global supplies.

• Must read: Saudi crown prince tangles with sovereign wealth fund over how to spend oil cash. (WSJ)