Natural gas prices in Europe have not enjoyed anything like the recovery that has driven power, coal, and carbon back up to pre-COVID levels. A long-term glut of gas supply hangs over the market, despite recent cutbacks in US production, and the outlook remains as gloomy as it did before the CODIV-19 pandemic swept around the world.

Despite US liquefied natural gas (LNG) exports being nearly halved during the last three months, supply remains strong as other producers appear ready to fill the gap, and new sources of pipeline supply to Europe will further marginalise US LNG.

A quick look at how energy prices have performed in Europe this year shows that crude oil and natural gas are the two laggards. German baseload power and API2 coal are within touching distance of their January 1 levels, while carbon has streaked ahead and has gained more than 20% since the start of the year.

Source: ICE Futures Europe, ICE Endex

TTF natural gas prices are down by just over 20% for the year, while front-month Brent is about 35% off from its January 1 price.

To be fair, all the main energy markets endured a rough start to 2020, with all five of the benchmarks falling over the first two months. And after the initial shock of Covid-related lockdowns in Europe, prices dipped very sharply – as much as 70% in the case of crude oil – before starting to recover in May.

As demand for natural gas ebbed, US shale producers started to shut in production. Daily feed gas supply to the six US liquefaction plants fell from 8.41 billion cubic feet on January 3 to as little as 2.82 billion cubic feet on July 9, data show.

The US briefly topped the list of export suppliers to Europe early this year, as a flotilla of 74 cargoes sailed to European ports in January, according to the US Energy Information Administration. By June and July, however, 70 shipments were cancelled. The US Energy Information Administration predicts third quarter exports will equate to about 3.7 billion cu ft/day of feed gas production.

But the curtailment of US exports has done little to boost European prices. The front-month and front-year contracts were largely unchanged as the market rolled into July, though the front-quarter contract rose sharply as traders focused on higher demand in the fourth quarter.

Source: ICE Index

There have also been regional developments in Europe, particularly the news that Russia is preparing to resume work on the Nord Stream 2 pipeline to Germany. Danish regulators gave clearance for Russian vessels to restart pipe-laying activities last month, and the project could be completed by as soon as early 2021.

The prospect of additional supply into the region has not materially impacted prices to date, but it does damp the outlook for LNG from the US. Shipments will need to look further afield for buyers once the pipeline is up and running. This loss of nearby market share may be one of the motivations behind new sanctions being prepared in the US Congress against the project.

Nord Stream 2 is likely to ship as much as 1.5 billion cu ft/day to Germany, which would help maintain high storage levels in the region, even after gas shipments along a southern route through Ukraine are reduced.

Whether Nord Stream has any impact on other LNG suppliers to Europe remains to be seen. Qatar continues to dominate supply to the region, and the Middle Eastern country’s determination to remain a leading exporter to Europe will likely force other sellers to consider Asia as a longer-term outlet.

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