Source: S&P Global Platts
European gas prices remain at sustained highs having reached record levels in October on the back of strong demand, upstream disruptions and winter supply concerns.
"We can't call these high prices a blip anymore -- it's been the case now for more than three months," MET International CEO Gyorgy Vargha said.
Vargha said extreme weather and lower production due to lack of maintenance work during the COVID-19 pandemic in the upstream were significant triggers for the recent high prices, and both factors are set to remain in play in the medium term in the form of weather extremes and underinvestment.
"Prices have been steadily holding in this Eur80-100/MWh range and structurally we have every reason to believe they should stay high," Vargha said.
"I'm not saying it will stay at Eur100/MWh for five years -- but even if it falls to Eur20/MWh, jumping back up to Eur100/MWh in a six-month period is absolutely in the cards," he said.
The "green revolution" in Europe is contributing to high gas prices, Vargha said, given that gas demand in the power sector is set to be supported by the move away from lignite and coal across much of Europe and the phase-out of nuclear in Germany.
"The first step is going to be gas in a lot of countries and there is also going to be significant electrification of vehicles, so demand for gas in the power sector is set to increase," Vargha said.
"I don't see any equal amount of investment to cover [the demand] in the medium term," he said.
Vargha acknowledged that a warm winter and cool summer could see the immediate picture for gas -- and electricity -- prices shift again.
But, he said, less flexibility in the system and unpredictable demand swings meant price volatility would likely continue.
He said the gas system in Europe was being shaped by the loss of Dutch flexible production from Groningen and restrictions on Russian volumes due to long-term contract flexibility adjustments, while in power there was less baseload supply as nuclear, coal- and lignite-fired generation is being closed.
"And because demand is also becoming more volatile due to climate change, everything is moving in a much more unpredictable way," he said.
In the short term, Vargha said weather would be the main driver on price, with just a few degrees shift in temperatures having a big impact on demand.
"In Europe, the demand set-up is largely tilted to weather. Plus or minus 2 degrees above or below is the equivalent of hundreds of millions of cubic meters of gas on a one-week horizon," he said.
MET, he said, is modelling the impact of weather changes on storage levels. A cold weather resolution could see European storage sites end the winter below 10% full, while factoring in weather in recent winters would see storages finish the season above 20%.
LNG is set to be the other defining factor in Europe this winter, Vargha said.
"LNG can save Europe," he said, adding that December and February would see more cargoes coming to Europe, and potentially more in January than had been expected.
The price spreads between the TTF and JKM prices point to volumes coming to Europe in February, but a cold spell in northeast Asia could also change the market dynamic.
"LNG and the weather are the two factors we should watch -- it's a joint system," he said.
European gas storage holders might also look to sell out of their stocks in January and February given the steep backwardation in the market, rather than wait till March when prices are much lower.
"Anyone who has molecules in January or February will want to empty them globally. They're going to do whatever they can to sell unless time spreads come closer together," Vargha said.
Vargha also said with the significant volatility in recent months in the European gas market, managing positions was increasingly important.
He said the gas market was increasingly beginning to resemble the oil complex in terms of benchmarks and price differentials, but that volatility at the TTF was still "absolute insanity" compared with Brent.
"The TTF can make a random 5% move in 20 seconds. If you want to manage this, all of your processes have to be perfect," he said.
"You have to know your positions on a live basis for every book, you have to understand the relationship between the price and your locational and time spreads, you need to be able to manage this whole portfolio and understand the different pieces," he said.
"If you're able to, then there's arbitrage, as not everyone sees the relationship between the fixed price and spreads that quickly."
Vargha pointed to the need to factor in all the elements of the European gas market at the same time, giving as an example the interplay between LNG imports, CCGT optimization, cross-border capacity optimization, storage optimization, currency hedging, and imports from Russia or Algeria.
"If you're not participating in all these plays, then you're going to miss a key impact that's going to ruin your position one day – it's like the 0 in roulette," he said.