European natural gas futures on May 18 slumped below €30 for the first time since June 2021, according to Bloomberg, in a stark reversal of last year’s market chaos and a sign of tepid demand as Europe recovers from its energy crisis. The region amassed high stockpiles after a mild winter as it rushed to import liquefied natural gas and curbed consumption. But demand remains weak amid an uncertain economic outlook and a seasonal lull.
Prices are now less than 10% of their peak levels after Russia curtailed supplies to the region in the fallout of its invasion of Ukraine. They are near the five-year average, though many consumers are still reeling from the market shocks of the past year.
While Yara International ASA confirmed this week that it is bringing its nitrogen plants in Ferrara, Italy, back to production, others warned that there may not be a mad rush to do so across the board. Like others, CF Industries Holdings Inc. believes a good bit of the estimated 40% of Europe’s ammonia production will remain offline.
“So the dynamic is European production probably stays off or a greater percentage stays offline, and that will be backfilled by imports, Bert Frost, CF Senior Vice President, Sales, Market Development, and Supply Chain told attendees of the BMO Farm to Market Conference on May 17. “So that will support the ammonia market going forward,”
Frost said the current cost to produce ammonia in Europe is still approximately $450-$500/mt, while it can be imported at $400/mt.
CF Senior Vice President and CFO Christopher Bohn noted that CF is still not producing ammonia at its Billingham, UK, site and is importing ammonia from Donaldsonville, La., to produce ammonium nitrate, as that is more economical. He said as you get out to November you can see a steep increase in gas prices. “So are you going to produce inventory now that’s going to sit until the fall. I don’t know if you’re going to turn on your plant at this time.”
Despite the drop in Europe, the global gas market remains tight, according to some observers. There’s a risk of “quite an overreaction” in prices if there are sudden changes in supply or currently “depressed” demand, Chris O’Shea, CEO of Centrica Plc – the UK’s biggest energy supplier – said during a call with analysts on May 18.
The recovery has been uneven across the region, and some gas users are still subject to energy contracts set when prices were higher – meaning there could be a lag in relief in energy bills. Traders also are eyeing the prospect of higher demand for electric generation in the summer months.
Central and northern Europe are set to see warmer weather next week, with Berlin and Helsinki among the cities seeing unusually high temperatures, forecaster Maxar Technologies Inc. said in a report. A sharp rise in the mercury could lead to higher gas demand to power air conditioning. Over the next few days, much of the continent will remain cooler than normal, however, according to Maxar.
A drop in Europe’s gas demand last year was steeper “than we saw in the pandemic, and so far 2023 consumption remains below the norm on subdued industrial output, mild weather, and a recovery in renewables,” said Bloomberg Intelligence analyst Patricio Alvarez.
Europe’s inventory levels are already above 64%, and the rate may be near 90% around August – much earlier than normal, said Jonathan Stern, distinguished research fellow at the Oxford Institute for Energy Studies.
“I would expect prices to keep falling, particularly as storage fills up,” as long as nothing unusual happens with the weather, supply, or Asia demand, he said.
Dutch front-month gas, Europe’s benchmark, settled 6.8% lower at €29.79 per megawatt-hour. The UK equivalent fell 7.1%. German front month power declined 2.3%, to €87.56 per megawatt-hour.