Forex Analysis & Reviews: 31.01.2025 - Why Is Gas Becoming More...

31.01.2025 12:49 AM

Why Is Gas Becoming More Expensive?

Gas prices are rising again. The benchmark Dutch TTF gas contract has surged to €52.37 per megawatt-hour, marking its highest level since October 2023. Given the current fundamental backdrop, this upward trend is likely to continue.

Firstly, weather conditions are driving an increase in gas prices as temperatures are getting colder in Europe. According to the mid-term forecast, starting Friday, temperatures will gradually decrease. In Germany, for instance, nighttime temperatures are expected to drop to minus 5-6 degrees Celsius, while daytime temperatures will range from 2-5 degrees Celsius. Next week, Central Europe can expect daytime temperatures to fall to 0-1 degrees Celsius, with several capitals experiencing temperatures below zero. This indicates a significant rise in demand for heating in the coming days.

Additionally, forecasters predict a decrease in wind strength, which will lead to reduced energy output from wind turbines. This expected decline in wind power generation will further contribute to the rising cost of natural gas.

Secondly, gas prices are also increasing due to the suspension of operations at three Norwegian gas fields. Recently, the Norwegian gas operator Gassco reported several unplanned shutdowns at the Troll, Karsto, and Asgard fields, which are experiencing technological issues that could significantly impact production levels.

The third reason for concern is the significant outflow of gas from European storage facilities. According to Gas Infrastructure Europe, European gas storages are currently 55.25% full. For comparison, at the end of January last year, these storages were filled to 72%. The current level for 2024 is comparable to the end of the gas withdrawal season (March 31), when 58.44% of reserves remained in storage. Although the withdrawal rate has slowed down in recent weeks due to milder temperatures and windy weather, the situation could change soon with expected colder weather on the horizon.

Is a 55.25% occupancy rate of gas storage facilities substantial or minimal? In Germany, there is a law that requires gas storage operators to ensure that their facilities are at least 30% full by February 1 each year. This level of filling is deemed adequate to conclude the heating season without interruptions by March 31, allowing for sufficient gas storage refilling during the summer months for the upcoming fall and winter. Therefore, the current level of gas storage in Europe (55.25%) is not critical. In Germany, specifically, gas storage facilities are filled to 57%. According to projections, even in the worst-case scenario—such as extremely severe cold weather—the reserves of natural gas are expected to reduce to about 20% by April.

The situation described is primarily theoretical, while the market is focused on the facts. Currently, the data indicates that the reserves in EU gas storage facilities are declining more rapidly this fall-winter season than in previous years. Notably, on January 29, 2024, the EU's gas storage facilities were reported to be 75% full. Analysts believe this decline is due to a combination of factors: the termination of Ukrainian gas transit, lower temperatures, and prolonged periods of calm weather.

These factors are expected to continue influencing the market in the medium term, which suggests that upward price pressure will persist. For instance, supply uncertainty remains a significant issue. Reports indicate that there are currently no substantial negotiations regarding the transit of Azerbaijani gas through Ukraine. Additionally, experts note that for Azerbaijan to significantly increase its gas exports to Europe, it must either boost production or redistribute its existing domestic consumption.

As a result, the current information background points toward a potential increase in the price of "blue fuel", expected to reach a range of 55-60 euros.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.