Filled reservoirs depress price: Why the gas price is falling and will continue to fall

Although gas supplies from Russia have almost come to a standstill, the situation on the stock markets is easing. Among other things, experts justify the drop in prices with well-stocked storage facilities, which reduced the risk of acute bottlenecks in the coming winter.

German gas customers are afraid of drastic price increases from their suppliers and see themselves spending the winter in unheated apartments. However, the situation on the stock exchanges is easing somewhat, although deliveries from Russia have almost come to a standstill. According to experts, natural gas buyers can hope for a continuation of this trend in the coming months.

“We will certainly see a drop in prices over the next 18 months,” says Timm Kehler, Managing Director of the “Zukunft Gas” association. They would probably be above the level of 2021, i.e. before the Ukraine war – but “well below what we have had to experience in the last few weeks and months”. In a study, the experts at the Energy Economics Institute of the University of Cologne (EWI) also predict declines in the coming years.

Compared to its record high at the end of August, the trend-setting European natural gas future has fallen in price by almost half to currently around 180 euros per megawatt hour. But it still costs more than twice as much as before the Russian invasion of Ukraine in late February and almost ten times as much as in early 2021.

Market traders justified the drop in prices in recent weeks, among other things, with well-stocked storage facilities in Europe, which reduced the risk of acute bottlenecks in the coming winter. In addition, there are record-high imports of liquefied natural gas (LNG) from the USA and falling demand due to the persistently high price level, explain the analysts at EnergyScan, the data provider for the utility Engie. In October, the gas deposits in some states could already reach their capacity limit. In Germany, gas storage facilities are currently 90 percent full.

A cornerstone of the future energy supply is liquid gas from the USA. The construction of the floating LNG terminals is progressing, says the head of the association, Kehler. Once these become operational, the current premium will decrease compared to the prices paid in Asia thanks to the simplified delivery. By 2030, the USA could become the largest gas supplier to the EU and provide up to 90 percent of the volume that Russia supplied in 2021, the EWI experts calculate.

However, the decisive factor in price development is consumption, the EWI study continues. “If EU gas demand were to fall by 20 percent by 2030 compared to 2021, wholesale prices could return to 2018 levels – regardless of whether gas trade with Russia is restricted or not.” Four years ago, the gas price was hovering around the €20 per megawatt hour mark.

According to the EWI experts, the electrification of industry, savings and the production of biogas as a substitute energy source could reduce gas consumption. Part of the drop in demand is likely to be due to the recession, which economists believe is inevitable. “The massive increase in electricity and gas prices is making the production of some goods unprofitable, so that companies are shutting down despite sufficient orders,” explains Commerzbank analyst Christoph Weil. “At the same time, uncertainty about future gas supply is making companies more cautious, which speaks for less investment.”

Analyst David Kohl from Bank Julius Baer is skeptical about plans to limit energy prices by the EU or individual countries. “The most effective measures, such as increasing Dutch gas production or auctioning additional emission certificates to temporarily lower the price of CO2, do not seem to have a high priority.” His colleagues from the ING Bank warn of the undesirable side effects of the discussed price cap for electricity, which is less controversial in the EU than that for natural gas.

Green electricity providers who produce comparatively cheaply could try to sell their electricity to non-EU countries such as Great Britain or Norway. This would force some EU countries to produce more electricity in gas-fired power plants, which would fuel demand. It is also questionable whether the reform will take effect quickly enough to ease the situation as winter approaches.