Throughout the autumn, a mild winter was forecast for Europe and Finland because of the prevailing La Niña weather pattern. Autumn remained warmer than normal until late December. Temperatures then fell across Europe, and rapidly changing forecasts pushed up winter forward prices on European gas exchanges.
The COVID-19 pandemic and an exceptionally warm previous winter drove European gas prices to a historic low last summer, reaching just EUR 5/MWh. Prices began rising in September, when the Gaspool Front Month price was around EUR 8/MWh. Front Month prices for the rest of the year were around EUR 14/MWh, a very reasonable level.
Gas exchange prices showed some nervousness in the autumn
Daily European gas exchange prices showed mild nervousness in late autumn, with forward prices rising and falling by EUR 1–2/MWh over a few days. The La Niña pattern, which began in the autumn and lowers global temperatures, tended to push global gas prices up, while the worsening COVID-19 situation tended to lower forward prices for coming months. Other factors also influenced forward prices, including the US presidential election and fluctuations in other fuel prices.
La Niña is the opposite of El Niño. During La Niña, Pacific Ocean surface temperatures are significantly below average, typically causing cold winter weather in areas including North America, Southeast Asia and China. Europe and Finland, by contrast, generally experience mild winters during La Niña, which was also the assumption in European gas markets throughout the autumn.
In early December, temperatures fell in China and Japan. Together with China’s improving economic outlook, this increased regional demand for liquefied natural gas, or LNG. Northeast Asian LNG market prices rose suddenly, prompting LNG vessels originally bound for Europe to be redirected to China and Japan. This raised European gas prices, with the increase reinforced by forecasts of colder weather in Europe at the same time.
Both predictable and unusual movements in Gaspool Front Month and forward prices
The realised December Gaspool Front Month price was around EUR 13.9/MWh, still in line with autumn quotations for the December forward. Following December’s price rise, January’s Gaspool Front Month price reached around EUR 16.1/MWh and February’s around EUR 19.7/MWh. Northeast Asian LNG prices fell after an early-January peak, quickly returning to early-December levels. Lower Asian LNG prices have also eased price pressure in Europe. The current forecast for March’s Gaspool Front Month price is around EUR 18/MWh.
According to the ICE exchange, April and May Gaspool forward prices are currently, on 17 February, just below EUR 17/MWh. Summer forward prices are around EUR 16.5/MWh. This is somewhat unusual, as summer prices are generally substantially below spring prices. Recent increases in other fuel prices are sustaining relatively high summer prices. Brent crude, for example, has risen by more than 10 per cent in two weeks. Gas forward prices for the final quarter of this year are around EUR 18/MWh. Summer and year-end forwards are fairly average compared with gas prices over the preceding four years.
Last November’s market review describes in more detail how gas prices are formed for Finnish end users.
The new SK index is working as planned and stabilising gas procurement prices
In late November, we launched the new SK index to replace the k-energy index discontinued at the turn of the year. SK index-based pricing is more stable than monthly Gaspool Front Month pricing. It suits users who value greater predictability and stability, as its price is formed from Gaspool forward prices over the three months preceding delivery. The SK index is also published one month before each delivery month begins.
At launch, we highlighted the index’s suitability for heating. Gaspool Front Month pricing, based on a single month, can rise quickly and lead to high gas prices in a cold winter just when heating gas consumption is high. Despite initially mild forecasts, that is exactly what happened this winter.
Customers buying gas through the SK index paid approximately EUR 1–1.5/MWh less in January and EUR 2–2.5/MWh less in February than they would have paid under monthly Gaspool Front Month pricing.
Market prices have since fallen from the high daily prices of early January. As a result, SK index-priced gas currently looks likely to be slightly more expensive in March than gas based on Gaspool Front Month prices.
Finland’s gas market has worked well during its first year open to competition
This is the first cold winter since the gas market opened. Only around 30 GWh per day of Balticconnector transmission capacity is available, although in late autumn approximately 50 GWh per day had been promised for winter. That level has not yet been reached because completion work and testing at compressor stations in Estonia have been delayed further.
Despite the cold weather, we do not believe Balticconnector’s capacity restriction has significantly increased gas exchange prices in Finland. The open gas market has generally operated well and steadily, despite cold days and increased demand.
Wishing you a pleasant rest of the winter,
Pekka Karinen, Gas Procurement and Portfolio Management