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Why aren't prices falling on the European gas market with full storage facilities and weak demand? The peculiarity of the global natural gas market is that, unlike the oil market, there is no single price on it. Nevertheless, despite huge price differences, the gas market functions as a single integral mechanism. Regional prices react violently to events that occur thousands of kilometers away from the place where these prices are formed. The interference of geopolitical factors in pricing in the European one-off market was particularly noticeable in 2022. But even in 2024, although its prices have stabilized compared to the year before, geopolitical risks continue to influence pricing. Moreover, it is impossible to explain the price behavior on the market this year without taking into account these geopolitical risks. This material is devoted to their analysis
Fundamental factors are pressuring prices, but they are not decreasing
Until the end of this year’s first quarter, the price dynamics on the European gas market were characterized by predictability. After an exceptionally warm winter in 2023-2024, the market ended the first quarter with gas reserves that were 13 bcm higher than the average gas in storage on that date in 2019-2023. Let’s recall that the total volume of underground storage facilities in Europe is about 110 billion cubic meters. The filling of UGS at the end of the heating season amounted to just under 60%. This meant that it would not be too difficult for European companies to prepare for the new heating season ahead of schedule, sometime in mid-August, rather than in November as required by EU regulations. In mid-June, the level of UGS filling in Europe had already reached 74%.
As far as gas supply concerns, constraints from Norway and the USA due to unplanned repairs were quickly resolved, if any even appeared. Although new global LNG liquefaction capacity additions in the first half of the year were not as strong as expected, competition among LNG producers intensified.
The decline in natural gas consumption in the EU and the UK has continued into 2024 and amounted to 4% in the first 5 months of the year. On the household side, the decline was due to record warm weather. In electricity generation, renewable energy successfully replaced gas-fired power plants. And industrial demand was reduced to a minimum due to low economic growth and mass closure of gas chemical plants.
Add to this weak Asian demand, despite low prices, which resulted in lack of real competition for LNG between Europe and Asia. The slowdown in gas demand in China is a consequence of the country becoming a world leader in wind and solar power generation, as well as the growth of its own gas production.
The natural result of the market situation was a decline in prices to levels below $300 per thousand cubic meters in February and March 2024.
However, already in April prices began to recuperate, which allowed the market to recover at least $100 per thousand cubic meters and return to the level of January prices. This price behavior cannot be explained by fundamental factors alone, namely the supply/demand ratio for natural gas, which clearly indicated the formation of a buyer’s market in Europe.
Two dates, after which there were strong upward market movements, are noteworthy. These are April 1 and May 19, 2024. Both dates coincide with the escalating geopolitical crisis in the Middle East. The first date was the Israeli missile attack on the Iranian consulate in Syria, the second marked the crash of Iranian President Ibrahim Raisi’s helicopter.
The escalating military confrontation between Israel and Iran contains destabilizing maritime logistics in the Strait of Ormuz, a key channel for about 20% of the entire global LNG trade. Closing the strait in the event of hostilities could cause prices to surpass the historical price record of $3500 per thousand cubic meters, according to consulting firm Rystad Energy. Fortunately, this did not happen in either the first or the second case, but the geopolitical premium in the price of European gas remained. (Chart 1)
Geopolitical premium in the price of gas
Iran is not interested in an armed conflict with Israel because the USA will inevitably be drawn into it. The USA, at least until the presidential election in November, is trying to avoid the skyrocketing oil prices that Iran can provide through its blockade of the Strait of Ormuz. The ensuing Israeli attack, the seizure of the container ship by Iran, was addressed to the USA as an argument for the reality of such a threat. However, Israel’s actions could not be left unanswered by Iran.
The retaliatory strike on Israel on April 14 was clearly demonstrative in nature. It was not intended to inflict significant damage, but served as a means of demonstrating Iran’s military might in the event of an escalation of action by its geopolitical rival. The drones and missiles were launched on a trajectory that made it easy to shoot down by Israel’s air defense forces. According to press reports, many of the missiles were not equipped with warheads.
After such a large-scale attack, the USA, fearing irreversible consequences, immediately began urging the Israeli authorities not to respond with a new strike. Nevertheless, the Israeli “counterblow to the counterblow” took place. But it also did not affect any important military installations in Iran. In this round of confrontation, the fragile peace in the Middle East has been preserved. All parties achieved satisfaction and conventionally saved face while hitting back at each other. However, a red line was crossed in the confrontation. Iran has not previously launched direct strikes on rival territory. The boundaries of what is permissible in the parties’ conflict have widened.
As can be seen from the chart, the second strong upward price movement coincided with the news of Iranian President Ibrahim Raisi’s death. Fortunately, in this case too, the world breathed a sigh of relief. Israel immediately declared its non-involvement in the incident. And soon the General Staff of the Armed Forces of Iran, on the results of the investigation of the disaster, said that the version of the helicopter crash due to an explosion caused by sabotage, was ruled out.
However, geopolitical risks have not disappeared. Moreover, the Netanyahu regime needs a victory to maintain its credibility. Israel has not abandoned its plans to provoke Iran and start a conflict in the region, while using America and NATO as instruments of war.
This has been Netanyahu’s main goal for the past 10 years, and it is obvious: to deal with Iran by the hands of the USA. Netanyahu has for years relentlessly argued that Iran already has nuclear weapons. He claimed this even when Iran was very far from having its own atomic bomb. The Israeli strike on the Iranian consulate in Damascus made no sense except one: to provoke a retaliatory Iranian missile strike on Israel and force the USA to go to war with Iran.
A new round of tensions has arisen over Israel’s announced plans this month to launch active military action against Iran’s proxy, the Shiite organization Hezbollah in Lebanon. The USA is trying to negotiate a settlement on the border between Lebanon and Israel, while at the same time continuing attempts to remove Netanyahu from the political scene by contributing to the collapse of his cabinet.
But whether these US attempts will be successful remains an open question. Lebanese militias are qualitatively and quantitatively different from Hamas, so this operation could be even more difficult for the IDF than in Gaza. Obviously, Iran will not remain a bystander to what is happening, with all the consequences for the global natural gas market.
Zuhreddin Zuhreddinov
Independent Expert. Oil, Gas, and Energy (Uzbekistan)
