Boiling over

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"We have all of the right factors in place, but the price is very sensitive... The price elasticity has changed. It is volatile, and the situation is potentially fragile." - Michael Lewis, Uniper CEO

Elevated price volatility will remain a feature of European natural gas markets for at least the next few years.

On the supply-side, European demand for LNG imports (as a share of LNG in overall gas imports) has more than doubled over the past few years which means it is now much more sensitive to supply-demand imbalances in global liquefaction capacity and LNG shipments. Meanwhile, on the demand-side, European natural gas demand is expected to become increasingly sensitive to winter weather conditions as gas generation is displaced by the growth in renewables.

Either way, natural gas prices are expected to remain highly sensitive to subtle changes in the underlying supply and demand dynamics. You cannot simply state that the market fundamentals are bullish or bearish any more. It’s on a knife edge, and is likely to remain that way.

This represents an extreme challenge for carbon market analysts since small changes can have big impacts on major end users of natural gas here in Europe.

For power generators gas prices affect fuel switching levels (i.e., clean-spark and clean-dark spreads), the overall impact on emissions from the power sector (the carbon intensity of future generation), and hence the desire to hedge future EUA requirements.

Natural gas is also a key feedstock and energy source for heavy industry (cement, chemicals, etc.). The past year has shown that companies are increasingly sensitive to the outlook for natural gas prices. Quick to stop production when prices become unaffordable, but then not wanting to resume output only to see gas prices spike once more.

Lets dive in.