Research agency Fitch Solutions Country Risk & Industry Research reports that European natural gas prices have fallen sharply from all-time-highs set just a week ago.  

Both the Dutch Title Transfer Facility (TTF) benchmark and the UK National Balancing Point (NBP) fell by 26%, following a gain of 62% on the TTF and 72% on the NBP over three weeks.  

Fitch Solutions says European Union (EU) legislators are weighing up options to intervene in markets through a price cap to lower impacts for the most price sensitive consumers.  

Word of the possible action from the EU Commission sent prices lower despite the start of a three-day shutdown of the key import pipeline Nord Stream 1 for maintenance.  

The announcement of the temporary shutdown from August 31 to September 2 had caused prices to rise sharply in the weeks proceeding, as concerns for a prolonged shutdown dominated the news.  

Despite an improved fundamental outlook, as natural gas storage builds reach target levels a month earlier than planned, Fitch Solutions expects prices to remain at elevated levels and well above historical averages.  

“We currently expect volatility to remain a key facet of natural gas prices and the risk of a full stoppage of Russian gas flows will keep prices well above historic averages for the next several years. We are likely to revise our forecast for both NBP and TTF higher in the coming days as a result of the recent price action,” the agency states.   

Moreover, Fitch Solutions explains that natural gas storage levels across the EU continue to post strong gains as high prices and voluntary efforts to conserve natural gas lower consumption, adding to storage volumes.  

The healthy pace of stockbuilding, with European inventories reaching the 80% of capacity November target just days earlier, puts Europe on track to near 90% of capacity or better heading into the peak demand season from November.  

“While the fundamental outlook for natural gas supply has improved over the last several months, acute power generation issues have helped to keep electricity prices high, further adding to the bullish sentiment supporting price gains,” Fitch Solutions notes.   

The agency adds that the risk of further curtailment of supplies from Russia remains acute, as do extreme temperature events, which could drive up energy demand, including natural gas for power, given the ongoing drought conditions in Europe which have limited other forms of both renewable and nuclear power across the region. 

The more comfortable outlook for natural gas supply heading into winter will do little to curb prices in the near term as a complete loss of Russian gas imports remains a threat.  

Additionally, China’s weakened demand for liquefied natural gas (LNG), which has seen cargoes diverted from Asia to Europe, is unlikely to remain that way.  

Should Asian demand for LNG return to normal levels, the competition for LNG cargoes would favour Europe owing to the high hub prices, but this dynamic will come at the expense of profits for natural gas-dependent industries, which have already curbed consumption sharply in response to high prices.  

More generally, a deteriorating outlook for the eurozone economies is setting an expectation for natural gas demand to fall. These conflicting factors for the bullish and bearish views have kept volatility high, aided by low liquidity in the market.  

Fitch Solutions states that the historically high demand for LNG in Asia will keep natural gas prices elevated as the limited supply of energy is set to repeat but with the added loss of Russian imports to Europe.  

“This dynamic is unlikely to abate fully by the winter of 2023/24 without a significant change in the outlook for Russian natural gas imports to Europe and we expect elevated energy prices stemming from the war in Ukraine to persist for several years.” 

Further, Fitch Solutions says the imminent return of the UK main offshore storage facility will support an increased supply buffer, with the main impacts likely to be felt by next year’s winter.  

The Rough facility, which is located in the North Sea, closed in 2017 after repairs and upgrades were deemed “uneconomical”.  

However, the site’s operator, Centrica, has received regulatory permission to restart injection and storage operations.  

The return to fully operational status will see the facility hold up to 5.7-billion cubic metres of natural gas, which equates to 7% of the UK’s 2021 annual volume of natural gas consumed, at 77-billion cubic metres.  

The site will add additional supply at short notice and help to shoulder the impacts of short-lived extreme temperature events.  

“While not a complete cure for natural gas prices, the return of the Rough facility will support lower and more stable prices in the long term,” Fitch Solutions reports.