Norwegian outages powering the rise of gas futures short term

While recession fears are still holding back some commodity prices, UK and European gas futures are firing on all cylinders. The UK front month gas contract is up nearly 40% on the week while Dutch TTF gas is trading 32% higher.

In comparison US natural gas futures rose much slower and are on course for a weekly gain of around 5%. Mild weather last week kept demand for the fuel low and utilities opted to put more gas into storage.

Outages in several Norwegian gas fields, some scheduled, some not, have caused tighter supplies, as did the planned maintenance closure of the TurkStream pipeline. One fork of this pipeline that transports gas from Russia to Black Sea ports delivers gas to Turkish buyers. The second supplies consumers in southern and southeastern Europe. Maintenance work will keep it off-line between 5-12 June.

Late last year Europe cut its gas demand faster than the UK in response to the tightness created by the conflict in Ukraine and this difference is still affecting the price differential in the two regions. Now both regions are in the process of refilling their storage although this process has slowed down over the past few weeks because industrial users and electricity generators have been buying more gas. Gas inventories across the European Union and the United Kingdom are currently higher than they have been on average over the last 10 years.

The US utilities are also busily adding to their gas reserves and have added 118 billion cubic feet into storage last week.

A rise in coal prices this week has provided support, triggering some technical buying as coal nudged its current 5-day moving average resistance. Both coal and gas are used for electricity generation.

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Asian demand continues to play a vital role in overall price levels. While Japanese demand declined over the last two months, economic recovery in China has boosted the country’s gas buying, as did the recent decline in LNG prices. The most demand came from power utilities in the north of the country.

The bigger picture for the gas market

When analysing the performance of gas prices over the last twelve month the picture is distorted by the spike immediately after the start of the war in Ukraine, which makes year-on-year comparisons in price almost meaningless.

In the early months of the conflict Europe and UK scrambled to detach themselves from Russian gas and find alternative supplies. By early spring the situation had mostly normalised except to the extent that both regions have now stored more gas than in previous years.

In terms of charts the more meaningful analysis is in the last five months. The dip in March and April was largely caused by recession fears and doubts about the short-term direction of US, UK and European rates. These still play a role but in a more medium-term time frame. The US rate rise cycle seems to be not far from over and while recession still can’t be ruled out the worst of the bearish pressure is likely to be finished.

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