"Energy Crisis a False Alarm?"... Natural Gas ETP 'Slippery Slope'

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minji Lee] Was the energy crisis just an overreaction? While other raw materials plummeted due to concerns over decreased demand amid an economic downturn, natural gas prices, which had been steadily rising, are now sliding down. This is thanks to European countries, which had been shaken by demand contraction from China and Russia's energy threats, rapidly building up natural gas inventories in preparation for heating demand.

On the 18th, at the London ICE exchange, the November delivery Dutch TTF natural gas futures, the benchmark for European natural gas prices, recorded €127.978 per megawatt-hour (MWh), down 9.8% from the previous trading day. On August 26, amid heightened concerns over Russian natural gas supply, prices surged intraday to €342, but have since plunged more than 60% in just over two months. This is the lowest level in three months. At the New York Mercantile Exchange, natural gas futures (November contract) are hovering around $6 per MMBTU, a significant 38% drop from about $9.68 two months ago.

The sharp decline in natural gas prices is because European countries are no longer striving to secure additional inventories. Just two months ago, Europe was making every effort to secure natural gas for winter heating demand. As a result, whenever Russia's state-owned company Gazprom halted operations of Nord Stream, natural gas prices would leap like a roller coaster. However, recent data shows European natural gas inventories significantly exceeding 90%, with Germany at 96%, Italy at 96%, the Netherlands at 93%, and France at 98.9%, greatly easing supply concerns. Jaeyoung Oh, a researcher at KB Securities, said, “With inventories already replenished to 90% in Europe, competitive purchasing demand with Asia and others has eased. Even though Russia stopped supplying natural gas through Nord Stream last month, the supply had already been significantly reduced, so it did not cause major damage to Europe.”

The smooth supply and demand situation within the U.S. is also lowering gas prices. Kwangrae Kim, a researcher at Samsung Futures, analyzed, “Over the next two weeks, temperatures in major U.S. regions are expected to be higher than forecast, and gas production is at an all-time high. Additionally, the shutdowns of LNG export plants Cove Point LNG and Freeport LNG have overlapped, reducing natural gas demand including exports, leading to price declines.” Furthermore, the slowdown in gas demand due to China's COVID-19 lockdown policies also appears to have contributed to the price drop.

As a result, investors who bet on rising natural gas prices are estimated to have suffered significant losses. Those who invested in products seeking twice the gains could face losses approaching 60%. For example, the ‘Samsung Leverage Natural Gas Futures ETN B,’ which invests in natural gas futures listed on the New York Mercantile Exchange, traded at around 49,000 KRW early last month but closed at 22,010 KRW on this day, recording a 56% loss. GSE, a city gas-related stock listed on the KOSDAQ market, closed at 5,140 KRW on this day, down 31% from 7,470 KRW recorded on August 29.

However, it is uncertain whether this downward trend will continue. Just as this winter is not the last winter, concerns over natural gas supply and demand could resurface at any time. The International Energy Agency (IEA) and the International Monetary Fund (IMF) have warned that the next energy crisis could be even more severe, raising concerns about a resurgence of the energy crisis. Gita Gopinath, IMF First Deputy Managing Director, said, “In Germany, the situation is expected to worsen next winter,” adding, “With a high proportion of manufacturing, the shock from the energy crisis will be felt more acutely.”

Looking at the long term, attention should be paid to the upward trend in U.S. natural gas prices. This is because Europe's efforts to secure alternative energy and the determination to expand imports of U.S.-produced LNG are becoming stronger. Chanyoung Ko, a researcher at NH Investment & Securities, explained, “Due to Russia's suspension of natural gas supply, European natural gas prices expanded to up to 10 times that of the U.S., but Europe's determination to increase imports of U.S. LNG will drive up U.S. natural gas prices,” adding, “Conversely, European natural gas prices will stabilize downward to pre-Russia-Ukraine war levels.”

This content was produced with the assistance of AI translation services.