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US and Europe gas prices: What's the impact of heatwaves and hurricanes?

18:51, 12 August 2022

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Stock photo of a hot summers day and a thermometer
Traders monitor heatwaves on the continent and the pending US hurricane season for how it will impact US and Europe gas prices - Photo: Getty

Cooling demand is soaring in Europe as it bakes in sweltering summer temperatures, adding pressure to an already tight natural gas market.

In the US, the market picture is not so dissimilar, with the September contract on the Henry Hub spiking to within a penny of $9.00 on Thursday. However, analysts said the main cause of this was down to a gas pipeline rupture and shut-in of Gulf of Mexico production – but the US is also now preparing for hurricane season.

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Natural gas pushed steeply higher yesterday (Thursday) afternoon on emerging news of a pipeline leak shutting-in production at up to six Gulf of Mexico offshore platforms operated by Shell (RDSA) and Chevron (CVX). 

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Crude oil similarly charged higher as more than 500,000 b/d of oil was shut-in alongside an estimated 0.3 Bcf/d of natural gas.

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“The pipeline leak occurred onshore, however, likely enabling a rapid return of supply. After reaching $8.994/MMBtu yesterday, the front-month natural gas contract slipped to $8.72 as of this morning on the likelihood of quickly restored supply. Still, yesterday's move may foreshadow potential market reactions should any tropical storms reduce Gulf of Mexico supply in the next 30-45 days as the heart of hurricane season approaches,” EBW Analytics said in a note sent to clients on Friday.

EBW said, more broadly, the swift increase in NYMEX gas futures and overwhelming market response to relatively mild stimuli over the past two days hints at the substantial latent upside price risks in the market.

“Last week, the news of a potential earlier-than-anticipated return at Freeport LNG sent gas prices careening higher. Liquidity is thin, exacerbating the extent of moves both higher and lower, while the market is on a perilously low storage trajectory through winter 2022-23 and highly susceptible to any disruption in supply or increase in demand. Moreover, if bullish developments draw in speculator longs ahead of the winter, substantial further upside price risks later this year may be in the cards,” EBW analysts added.

 

Impact of the heatwave on Europe gas prices?

At the time of writing on Friday, the price of natural gas on the benchmark European Dutch Title Transfer Facility (TTF) was on track for a weekly gain of nearly 6%, although prices were slightly lower on the day. 

Overall, futures are around 600% higher than in 2021, according to ICE Exchange data.

The energy crisis is being felt globally but has particularly gripped Europe since Russia invaded Ukraine in February 2022 as it led to supplies of Russia’s natural gas to the bloc being reduced substantially as a result of sanctions on the Kremlin – and Moscow also cutting capacity in retaliation.

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Europe’s natural gas market now faces extra pressure from the severe heatwaves with Europeans turning up the dial on their air conditioning systems to stay cool, using more energy.

Moreover, the River Rhine – a crucial commodities transport route that runs through Germany – has dropped to very low water levels after an extended period of drought caused by the heatwave, threatening supplies of coal and diesel transported via barges.

 

The heatwave is even straining Europe's nuclear power plants. Some, including in France and Belgium, have been unable to run at full capacity because of the higher river temperatures and low water levels which cool them adequately. As a result, the generators have had to use more gas.

Europe is aiming to have 80% of its gas storage in place by November for the winter months but analysts say it will be a difficult target to meet with the energy situation exacerbated by the heat.

In a bid to help ease supply pressures, the European Commission announced plans on Wednesday for bloc members to voluntarily cut their gas use by 15% until March, warning them that without deep cuts now they could struggle for fuel during winter if Russia cuts off more supply of the key commodity.

 

Europe gas price forecast

EU Natural Gas is expected to trade at €218.17 MWh by the end of this quarter, according to Trading Economics global macro models and analysts expectations.

Looking forward, it estimates it to trade at €299.43 MWh in 12 months time.

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