Base Case Scenario Sees Abnormally Elevated World Gas Prices Throughout Entire Upcoming Winder

Energy and electricity prices in Europe set new records every day. Wholesale prices for natural gas are at their highest in years, and have more than doubled since the spring. The main causes are a resurgence of global demand, especially in Asia, and worries that European countries are not putting enough fuel in storage to prepare for winter.

Just a few weeks before the start of the heating season, gas and coal reserves in the region remain significantly below their usual levels (in the range of 70%’s vs. a historic average of over 90%’s). The fuel shortage is also driven by limited gas supplies from Russia, declining production in the North Sea and the need to compete with Asia for LNG supplies. Likewise, working gas in U.S. storage, the amount available to the marketplace, has fallen to its lowest level for this time of year since 2018. As of the week ended Sept. 10, working gas in storage stood at 3 trillion cubic feet, well below both a year ago and the five-year average.

On top of that, a fire on Wednesday interrupted the supply of electricity on a critical cable connecting the UK and France, causing two British chemical fertilizer plants to shut down. Furthermore, Norway's chemical fertilizer plant Yara (YAR.OL) announced curbing ammonia production at a number of plants due to a surge in the price of natural gas.

According to a recent Goldman Sachs research note, soaring energy prices in Europe pose risks of power outages this winter, especially if cold weather and lack of strong winds in the North Sea rapidly depletes already low natural gas inventories . The bank's analysts believe that high gas prices may even topple the power generation balance and thereby eliminate the shortage of natural gas in Europe - something that looks more like mockery than forecast. Goldman analysts led by Samantha Dart said the Dutch Title Transfer Facility (TTF) contract could balance the market at $17.60/MMBtu (million British thermal units) amid normal winter weather. That would allow for maximum gas-to-coal switching in the power sector and help normalize end-of-winter storage. In the U.S. front-month natural-gas futures NGV21 rose to $5.46 per MMBtu on Sept. 15, the highest since February 2014. Prices have more than doubled for the year, trading 115% higher year to date.

However, this means that in the event of colder than usual winters, the region will have to compete with Asia for LNG supplies, and this is fraught with further price increases. There is also a rather high risk that even the redirection of LNG flows to Europe will not be able to create sufficient reserves for the region to hold out until the end of winter, Goldman Sachs analysts write. At the same time, the situation is expected to deteriorate even more if the winter turns out to be colder than forecast in both Europe and Asia.

In a MarketWatch’s article dated Sept. 16, there is a valid point that global liquefied natural gas (LNG) exports may increase by 20% to 25% this year, while prices for traditional energy sources including uranium and coal at the base case scenario will remain abnormally elevated through the entire upcoming winter season, while the pessimistic scenario suggests their further double-digit increases, that could be only episodically interrupted by some extraordinary measures that will demonstrate only limited efficiency.