European Natural Gas Prices Dropped Astonishingly to Negative Zone, But Are Likely to Rebound Shortly

While the prices of natural gas in the U.S. state of Texas fell into negative territory this week, the prices of natural gas in high-frequency trading in Europe also turned negative at about the same time. Europe and the United States, which are suffering from natural gas shortages, are now absurdly having no one to take over.

Natural gas prices at the Waha Center in the U.S. Permian Basin fell 85% to $0.41 per million British thermal units on Monday, and fell further to around -$2 on Tuesday.

Also on Monday, the spot price of Dutch natural gas futures TTF (ICE Endex Next Hour) once fell to -15.78 euros, a record low. Settled every 60 minutes, the contract is primarily used as a risk management tool for high-frequency natural gas traders, but is not a European benchmark.

The reason for this dramatic situation in Europe and the United States at the same time is the problem of storage.

The natural gas pipelines in the Permian Basin of the United States cannot operate normally as they are already fully loaded, and the natural gas can only be stockpiled in the Permian Basin. In Europe, because the gas storage facilities across the continent are close to full storage, a large number of LNG tankers are congested at the ports of the Spanish Sea and cannot be unloaded.

Trouble with refilling

Due to sanctions on Russia, European countries have been buying natural gas globally since the summer to prepare for the following winter.

At the tireless efforts of the European Union, energy companies and governments are spending huge sums of money to fill up various gas storage facilities within their borders. At present, the average gas storage level in the EU has reached 93.4%, and the natural gas storage level in Germany has reached 97.5%.

In addition to near-full storage levels, there is a huge amount of LNG heading to Europe.

According to statistics, Europe is expected to welcome 82 liquefied natural gas (LNG) ships this month. At present, about 60 LNG ships are sailing to or have reached the north-west Europe, the Mediterranean Sea and the Iberian Peninsula, while there are about 35 LNG ships sitting idle outside Spanish ports because they cannot be unloaded.

This is also the main reason for the negative prices of natural gas in Europe. Due to the lack of available storage space, sellers are now desperate to fine someone to take over the shipment. For this reason, they have to pay money to sell the goods, just to get rid of them. Ultra-short-term spot prices also plummeted as a result.

Poor infrastructure

In April 2020, the futures price of U.S. WTI crude oil for delivery next month plunged 306% in one day and closed at -$37/barrel. The main reason for its negative price was the severe lack of storage and offloading capacity due to the covid-19 pandemic, forcing speculative traders to significantly reduce their long positions.

More seriously, WTI crude oil futures are often heavily traded by institutional and retail investors and are generally referenced as the benchmark price for U.S. oil.

However, the negative price of TTF futures this time brought little impact, and it only appeared abnormal in the futures of high-frequency traders. And the TTF next month contract, as a benchmark, is unlikely to show negative prices.

The Dutch benchmark TTF natural gas price closed at 99.79 euros as of October 25, down more than 70% from the year's high of 339 euros.

While the benchmark price was positive, its price trend and the negative price for next-hour contracts both pointed to a huge flaw in the European gas market: infrastructure.

Even if European scientists say Europe is unlikely to see a cold winter this year, but a mild winter, Europe will still be challenged by natural gas shortage until next spring. So the EU needs to store as much gas as possible, but the scary thing is that the storage capacity is nowhere near keeping up with the EU's consumption.

On the other hand, shipowners are still reluctant to divert to other markets, such as Asia, even if a large number of ships are blocked in European waters. This situation may also indicate that shipowners are more convinced that there is a possibility of soaring natural gas prices in Europe in the short term.