The European gas market is no longer reminiscent of the pre-Covid world: it is characterised by permanently high prices, continental purchasing competition and completely transforming trading. Márton Szépfy, CEO of E2 Hungary, speaks about why Europe is at a competitive disadvantage and what consequences the LNG-based procurement model has for the players of the European and Hungarian economies.
Source: Portfolio.hu
Europe's economy has faced major challenges in recent years. Although there was some industrial recovery after Covid-19, the energy crisis that unfolded in 2021-2022 has set back the European manufacturing sector again.
In recent years, the exchange-traded price of natural gas in Europe has soared to unprecedented heights (reaching a level of several hundred euros in August 2022). Despite the fact that the price of gas currently listed on the Dutch gas exchange (TTF), which is considered as the European benchmark, is in the range of 30-35 EUR/MWh, this is also well above the usual market quotations of the previous decade. With this price environment, the European industry continues to be at a significant competitive disadvantage, said Márton Szépfy, CEO of E2 Hungary, who heads MET Central Europe's commercial activities in Hungary.
In his opinion, this is something worth to be taken seriously because after a series of crises, stable operations and a long-term procurement strategy coupled with the necessary flexibility have become the focus of operations of industrial users. Meanwhile, most customers are not looking for another short-term sales deal, but a strategic partner with whom they can plan for the long term. The still volatile European energy market and the continent's import exposure continue to keep the risk of energy purchases high.
Europe is a net importer of energy, so it is in a constant buyer position in the market, Szépfy highlighted. The continent buys the gas it needs even if unrealistically high price levels arise due to global price competition because heating, electricity supply and industrial processes have to be maintained. He also noted that although a number of plans have been drawn up, there is no factor that would push down European gas prices in the long term. While the region is permanently exposed to international price wars, other regions are reacting more flexibly to price signals.
As an example, the CEO mentioned that unlike Europe, China's industry is much more price-sensitive. “There, a local production company will not be active with gas prices around 70-80 EUR/MWh. They prefer to pause production, stop or switch to cheaper solutions, such as coal-based generation. Thus, the resulting decline in demand sets a kind of ceiling for the world market price of LNG. Of course, as a result, at some point demand constraint will appear at extremely high price levels, but at the European level, due to our dependence on imports, we cannot expect permanently low prices. Our continent competes for energy on the world market with the economies of other continents” he said.
The turbulent operation and unpredictability of European energy markets in previous years have been further exacerbated by the fact that price volatility has attracted a lot of speculative capital into the market. Márton Szépfy drew attention to the fact that financial investors prefer volatile markets because they can make large profits on speculative price movements. “The period of the energy crisis was Canaan for these players” he said, as there were extreme fluctuations in gas prices.
However, the situation has now changed, and as the rough swings in prices have somewhat subsided, some speculators have withdrawn, but this is a fragile balance that depends on a number of market and geopolitical factors and can make a sharp turn at any moment. At the same time, he thinks this is a self-reinforcing process: if the fluctuations moderate even a little, the terrain is less attractive for speculators, they take their money, which further reduces the amplitude of price movements.
As a result, in the long term, we can gradually return to more predictable pricing driven by the demand of industrial users, from which a significant part of short-term financial speculation will be eliminated, he highlighted, but added: “A new level of equilibrium is taking shape, we should not expect the pre-Covid era of cheap gas to return.”
A sign of partial market consolidation is that forward prices rarely show extremes, typically in the +/- 5 euro range. Thus, overall, gas market trends point towards a narrow price corridor, he said.
At the same time, the shift away from regional sourcing (globalisation of the European gas market) will have unavoidable consequences for Europe. As Szépfy put it, by turning to the LNG market, the EU immediately turned a local pricing problem into a world market pricing problem.
He added that the TTF originally represented the “middle field” of Europe and as a virtual trading point in the Netherlands, at the centre of gas infrastructure, it reflected the internal conditions of the continent. Nevertheless, European gas prices are already driven by international supply and demand, and they are affected by Asian and American processes as well as local European events.
Therefore, the question arose at MET Group: could stable gas prices be achieved in Europe in the long run as is the case in North America? The equivalent price of the US Henry Hub (US gas benchmark) converted to EUR/MWh has been a fraction of the TTF in recent years. Márton Szépfy said that the primary reason for this is the shale gas revolution in the USA: American production has exploded over the past decade, the country has become self-sufficient in gas and has even turned into a net exporter.
For Hungarian and regional industrial users, these prices still seem unattainable. The CEO emphasized that although there are financial derivatives and swap constructions through which European buyers can enter into contracts on the Henry Hub index, in the end, physical supply is almost always adjusted to some European price.
That is why we are now working to make a product construction available to our partners as soon as possible that preserves the main characteristics of the Henry Hub-indexed US markets: stability, predictability, liquidity and flexibility opportunities that are well suited to long-term planning, he added.
At the end of the conversation, Márton Szépfy also mentioned that although the size of the Hungarian gas market has shrunk in recent years, mainly due to the decline in industrial consumption, for the first time since five years of decline, no further reduction in Hungarian gas consumption has been experienced this year. This was partly due to the revival of gas-intensive industries, in addition to the increasing demand for heating due to colder winter weather. The question arises whether the demand for natural gas is expected to increase in Hungary in the future, or whether the stagnation/decline envisioned as a fundamental trend will remain.
According to Márton Szépfy, it is crucial what energy policy decisions are made. If new gas-fired power plants are built, they may increase gas consumption somewhat. However, he emphasized that the energy demand of gas-intensive industries will be more decisive in the development of gas consumption, while the increasing electricity production will be less so. The size of the Hungarian gas market is expected to remain moderate in the future, as energy efficiency measures, electrification and the spread of renewables will restrain the growth in demand for natural gas.