European economy hit by an oversupply of natural Gas, prices slash to a decade low

Europe is struggling with scaling back the abundant supply of natural gas since the recession forces the world over have pulled the demand down to a significant level. There has been a sharp fall in the prices of LNG since the beginning of the year. In the last quarter, the prices dropped further, hitting the lowest in a decade. The analysts predicted the price fall to continue through 2019 and 2020.

With the storage sites nearly full amid the ongoing supply from tanker and pipelines, the situation is becoming increasingly difficult to manage. Though the LNG producers have brought the gas production down by 5.75% a year, with few repairs and maintenance fixes in the gas oil fields the prices continue to fall, hitting as low as Eur9.375/MWh in June 2019, as compared to almost Eur30/MWh in late September 2018.   

Niek van Kouteren, a senior trader at PZEM, a Dutch energy company said, “In September, gas storage sites in northern Europe will be full, increasing the risk of a further downside in prices. Under a certain price, producers would be forced to extract less gas. But at the same time, big suppliers such as Russia” are trying to increase market share.”

Norbert Ruecker, head of economics at Julius Baer Group Ltd, said that the only way to prevent the free fall of LNG prices is by convincing the biggies like Russia and Norway to turn off the tap or put the deliveries of the extra cargoes, carrying liquefied natural gas, on hold.

Ruecker warned that the Dutch prices might come down by another 20% in the autumn. He said, “If things turn out really bad, maybe the bear case is even lower.”

Russian energy giant Gazprom PJSC said last week that it would bring down its exports to Europe to 192 billion cubic meters this year. It would be 4.5% lower than the record-high volumes in 2018. Its average gas price is also expected to fall by 13% compared to last year.

Russian Gazprom is not worried about price fall as its sheer focus is on grabbing greater market share.

“When we have an opportunity, we make extra sales,” Mikhail Malgin, deputy department head at Gazprom Export, said on a conference call with analysts last week. “The market share per se is not our goal but rather a consequence of our actions”

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