28.12.202115:10 Forex Analysis & Reviews: European gas prices are falling by 9%, though this fact is not optimistic

European natural gas futures in January fell by 9%. On Tuesday, the price fluctuated in the range of $1,135 - 1,200 per 1,000 cubic meters.

Natural gas futures have been declining for the fifth trading session in a row. Today, the value of the TTF index is almost $1,165, i.e. about 7% below the settlement price recorded the day before. Later, it accelerated its decline and dropped to $1,135.7.

Notably, on December 21 European gas prices hit its all-time high of $2,190.4. After reaching this record, the quotations have been gradually decreasing during the last seven days. Despite a short-term drop, prices in December are still high. Thus, January futures on the ICE Futures platform slightly exceed $1,400, while on the spot market the same figure is close to $1,350.

Additional supplies of LNG contribute to the decline of gas prices today. Thus, 20 tankers with American natural gas headed for Europe. Another 14 ships are awaiting orders.

This spring, a sharp rise of natural gas prices in Europe began. The average price on the TTF spot market was at the level of $250-300 per 1,000 cubic meters. An unprecedented surge of prices occurred in late summer. The day-ahead contract suddenly topped $600, and the market has been unsteady ever since. In early October, a new period began on the gas market: the EU commodity prices reached the $1,000 threshold. December was even more extraordinary for the market as natural gas prices doubled, puzzling European governments. The leaders of the countries highly dependent on gas exporters were equally surprised and worried. Moreover, gas hubs have never seen such steadily high prices in Europe since 1996.

The main reasons for this price boom are the record low levels of underground storage capacity in Europe and the limited supply from the main energy suppliers. High demand for liquefied natural gas (LNG) in Asia and Latin America compounds Europe's energy crisis as Europe has to compete with them. Uncertainty about the launch of Russia's ambitious Nord Stream 2 project is one of the key factors contributing to the crisis.

VYGON Consulting Head of Research Maria Belova says that any reactions are possible on the spot market, including the rise in prices up to $ 3000 per 1,000 cubic meters. The impulse for such a jump may be a cold snap, even in one of the EU countries.

Natural gas prices are likely to remain extremely high and volatile until the end of the heating season in Europe. As long as the amount of gas in the European gas storages remains far below the seasonal norm, price hikes around high marks will continue. The only way out is the launch of Nord Stream 2. The growth of gas supplies from Russia can bring the prices below $500 per 1,000 cubic meters. The normalization of gas demand in Asia is most likely highly significant.