Why are EU gas prices not higher already?

Investing.com -- European natural gas prices have remained relatively contained despite major disruptions to Middle Eastern liquefied natural gas (LNG) exports, as additional supply and weaker demand have cushioned the impact, according to UBS analysts.

In an October 5 report, UBS said higher LNG production outside the Middle East and reduced consumption across Europe and Asia had helped offset supply losses caused by the Iran war.

Middle Eastern LNG supply declined by approximately 60 billion cubic metres (bcm) between March and September, while additional production elsewhere contributed nearly 40 bcm, including 17 bcm from the United States.

Asian LNG imports fell around 9 bcm year-on-year during the period, while European imports declined approximately 10 bcm, limiting immediate price pressures.

UBS warned that these offsets could prove insufficient as winter approaches and heating demand increases.

European gas storage remains roughly 15% below seasonal averages, with inventories expected to enter winter at 74% capacity and decline to approximately 25% by spring.

The bank estimates Europe could require around 27 bcm more LNG during winter than during this year’s summer months, with Asian demand potentially increasing by another 2 bcm to more than 20 bcm.

UBS consequently raised its fourth-quarter Dutch TTF gas price forecast to €75 per megawatt-hour from €62 previously.

Its 2027 forecast increased to €45 from €40, reflecting expectations of a slower recovery in Qatari LNG exports and continued European efforts to phase out Russian gas.

Under a prolonged disruption scenario accompanied by colder weather, UBS sees fourth-quarter TTF prices averaging €90/MWh, with potential peaks near €120/MWh.

A faster recovery in Qatari shipments and milder temperatures could instead bring fourth-quarter prices towards €50/MWh.

UBS expects LNG supply to recover more slowly than oil because of shipping, infrastructure and contractual constraints.

The bank said winter temperatures and the pace of Qatari export recovery will determine whether Europe’s relatively muted gas price response continues.