The European Gas Prices, which are already in a downward spiral, now face new uncertainty as a result of increased rhetoric between Iran and the US, fuelled by President Donald Trump’s statements, has reignited concerns over the safety of the Strait of Hormuz, an important transit point that is used for one fifth of all seaborne LNG deliveries.
Bloomberg reports that LNG shipments are nearing normal after a Monday slump. Bloomberg indicates volumes have almost returned to average for the first half January.
The recovery is in line with reports from earlier that the US was returning to normal.
The situation is still critical, however, as the EU’s gas storage only stands at 43.5% according to Commerzbank AG.
These levels will drop by an extra 15 points at the end of march in a normal winter.
Barbara Lambrecht is a commodity analyst with Commerzbank AG. She said that the demand for lower temperatures in Europe has been forecast, but weather predictions have changed wildly recently.
The signs here are better, however, after the US resumed LNG exports.
US LNG Import Dynamics and European Import Dynamics
According to a recent study by the Bruegel Think Tank, EU gas imports have been on a steady upward trajectory.
The data collected in the first twenty days of the year shows that imports to the European Union were 14% more than they had been during the same period the year before.
The Union’s energy reserve is likely to be affected by this significant increase in gas supply.
Assuming paribus (meaning that all other factors are constant), it would be natural to expect a correlation between a greater volume of imported gas and a lower rate of withdrawal of the stored gas.
The dynamic indicated that the pressure could be easing on reserves. This is good news for energy security in particular during high demand periods.
This trend will determine the EU’s ability to withstand any supply shocks that may occur in the remainder of this year.
Henry Hub: inventory and the US market
Happiness for one person is often at the cost of someone else’s misery.
On Thursday morning in the US the Henry Hub front-month contract was only $3.75 per MMBtu, about $3 less than it had been on Wednesday.
Lambrecht said:
The massive drop in sales was caused by a change of contract.
The return of LNG has led to an increase in the price on both sides of the Atlantic.
According to the US Department of Energy, US natural gas stocks dropped by 242 Billion Cubic Feet in the most recent reporting week. This was more than the market expected.
Although the inventory has been reduced in recent months, there is still a large overhang.
The current inventory level is 5% higher than the historical five-year average.
Market watchers are concerned about this deviation, because the decline rate has been slow.
Steep drop in stocks likely
The data from the latest week show that this change is only marginal. This suggests that there is no structural correction of the imbalance between demand and supply that would lead to a sustained recovery in prices or a normalisation of the market.
Continued accumulation of inventory acts as a floor on price increases, creating a negative sentiment on the market in spite of other positive fundamental indicators.
According to Lambrecht, the impact of winter storm last weekend on figures appears either minimal or has not been reflected yet.
Due to the storm that hit last week, a steep decline in stock prices is likely during this reporting week.
It remains to be determined whether the stock market will experience a decline record, as many expect.
The Henry Hub Natural Gas contract at the New York Mercantile Exchange, as of the date this article was written, had risen 4.4% to $4.098/mmBtu.
As new information becomes available, the post Strait of Hormuz fears and low EU gas storage reignite insecurity over European gas price may be updated.
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