Gas prices have been rising since early summer on European gas exchanges, Gaspool and TTF, whose indices also underpin Finnish gas prices. We reported the increase on our website in early August, and prices have continued to rise since then.
The main reasons remain the same: low gas storage levels following a cold winter and spring in continental Europe, sharply increased energy demand in Europe and Asia, high EU emission allowance and coal prices, weak wind and solar power generation, and uncertainty over the commissioning schedule for Nord Stream 2.
A cold winter and spring depleted gas storage
The cold winter and spring brought European underground gas storage levels exceptionally low. Storage is normally replenished from March, but this year additional demand caused by cold spring weather meant substantial refilling could not begin until late May.
At the start of summer, concern about whether storage could be refilled during summer and autumn began to push gas prices up. Storage levels in most countries are now at their targets, but in Germany and the Netherlands they are only around 65–70 per cent of target. Nevertheless, current gas stocks across the EU are estimated to be sufficient even for a cold winter.
Recovery from the pandemic increases energy demand
Demand for gas, like other fuels, electricity and raw materials, has grown as the economy has recovered rapidly from the coronavirus pandemic.
Prices on continental European gas exchanges fell to an exceptionally low EUR 5/MWh in summer 2020 following the pandemic-induced global economic shutdown. Over the autumn and winter, prices rose fairly steadily, reaching around EUR 20/MWh in February. They then fell to approximately EUR 17–18/MWh in March and April.
Low storage levels and increased demand pushed prices up again in May. The June gas price, Gaspool and TTF Front Month, was around EUR 25/MWh, rising to around EUR 30/MWh in July and EUR 35/MWh in August. The rise accelerated as autumn progressed. The September Front Month price reached EUR 44/MWh and October’s EUR 65/MWh.
Gas demand and prices during the summer were also lifted by sharply higher market prices for emission allowances (EUA) and coal (API2), which encouraged electricity generation to switch from coal to gas, particularly in summer.
Strong Asian demand for liquefied natural gas, or LNG, has also raised European gas prices, as LNG vessels originally destined for European import terminals have been redirected to Asia. Asian demand during summer and early autumn was boosted by greater cooling needs in unusually hot weather and recent forecasts of a potentially colder-than-normal Asian winter due to La Niña.
Maintenance and disruptions in production and transmission
Even under normal conditions, gas transmission capacity is lower in summer than in winter because of annual maintenance. In response to strong demand, gas producers and transmission companies successfully supplied considerably more gas than usual to European markets during the summer.
There were some disruptions to Norwegian and Russian gas production and transmission connections during summer and early autumn, causing daily gas prices to fluctuate in August and September. The most significant was a fire in early August at a gas condensate separation plant in Russia’s Novy Urengoy production region, which substantially reduced gas flows from Russia to Europe for about a month.
Gas flows from Russia have also been reduced by its need to replenish its own underground storage following low levels after last winter and spring.
Nord Stream 2 pipeline approvals are still pending
Alongside the factors above, gas prices have fluctuated because of uncertainty over when the new Nord Stream 2 pipelines will enter service, owing to challenges in the approval process.
The first of the two new pipelines is technically ready, but commissioning could be delayed until next summer because of the complexity of EU legislation and approval procedures.
Electricity prices are exceptionally high
Continental European electricity prices have been exceptionally high in September and October, at EUR 100–200/MWh, partly due to low wind and solar generation during summer and autumn.
Prices are also high in the Nordic electricity market because a dry summer has reduced Norwegian reservoir levels. Weekday exchange electricity prices in Finland have been around EUR 70–120/MWh in September and October, compared with a normal EUR 30–50/MWh.
Winter and spring prices are difficult to predict
High gas prices result from the combined effect of all the factors above. As winter approaches, daily quotations and forward prices continued to rise in late September and October, but have fallen in recent days from peaks above EUR 100/MWh. Forward prices for the remainder of the year and next winter are currently, on 19 October 2021, around EUR 90/MWh.
Gas prices are exceptionally high by historical standards: over the past 20 years, the highest monthly prices have been around EUR 35/MWh. The accompanying chart shows that, in the years preceding this one, the monthly price peaked at EUR 27/MWh in September 2018 and generally fluctuated around EUR 15–20/MWh.
Prices are expected to fall substantially in the second quarter of next year, for which forward prices are currently around EUR 45/MWh. Forward prices for 2023 are around EUR 30/MWh and for 2024 around EUR 25/MWh. Forward prices closely follow near-term prices, so they will fall quickly if the current spot price starts to decline.
The gas market has been highly volatile in recent weeks, with intraday price movements exceeding ten euros. This makes winter and next year’s prices very difficult to estimate. Weather in Europe during the rest of the year and winter will have a considerable impact. If autumn remains warm, German storage could reach sufficient levels, easing the market’s greatest concern. If other factors driving gas prices also develop favourably, relief could come quickly.
The SK index has benefited customers
Suomen Kaasuenergia’s SK index, introduced at the turn of the year, has worked well. It has brought predictability and stability to gas procurement prices. The index price is formed by fixing TTF and Gaspool forward prices in several tranches during the three months preceding delivery. We also publish the SK index one month before the delivery month begins, whereas the normal Front Month price is only known at the start of the delivery month.
We have been successful in fixing prices for the SK index. Apart from March, customers buying gas using the index have paid approximately EUR 1–15/MWh less than they would have paid with prices linked to monthly exchange-based Gaspool or TTF Front Month prices.
The SK index is mainly used by consumers and small and medium-sized industrial customers. Our largest customers, consuming more than 5 GWh of gas a year, can fix prices flexibly according to their own needs and outlook. We are happy to provide current market information to support their decisions.
If you are interested in price fixing or would like more information about the market or our services, please contact our sales team.
Further information:
European gas market prices can be followed on the Intercontinental Exchange (ICE) website, among other sources. You can find TTF forward prices (EUR/MWh) here.
This market review was prepared by Pekka Karinen, who is responsible for gas procurement and portfolio management at Suomen Kaasuenergia.