Europe’s gas market is now tied directly to the same Gulf disruption that is driving crude, so escalation in the Middle East lifts both energy risk premia together. If Europe has to outbid other regions for LNG this winter, the strain falls hardest on price-sensitive importers in Asia and emerging markets, tightening the global market further. Higher gas prices also feed through to European power costs and industrial margins, adding to inflation pressure. The upside skew also strengthens the economic case for burning oil products instead of gas where switching is possible, a modest extra support for diesel and fuel oil demand.
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Goldman’s base case still sees European gas easing to 70 euros, but low storage and shrinking Mideast LNG flows mean the risks point the other way.
Summary:
- Goldman Sachs says risks to its year-end TTF forecast of 70 euros per megawatt hour are skewed to the upside
- Low European inventories and a month-on-month drop in Middle East LNG exports have supported TTF in the mid-80s
- In a low-supply scenario with average weather, the bank estimates winter TTF would need to peak near 105 euros/MWh to cut enough LNG demand outside Europe
- Goldman says uncertainty over winter weather widens the range of possible price outcomes further
Goldman Sachs sees the risks to its year-end forecast for European natural gas prices tilted to the upside, as low storage levels and falling Middle East LNG exports leave the region exposed heading into winter.
The bank’s forecast is for the Dutch TTF benchmark to stand at 70 euros per megawatt hour at the end of the year. That sits well below current levels, with Goldman noting that low inventories and a sequential drop in Middle East LNG exports have supported prices in the mid-80s. The gap implies the bank still expects some easing in its base case, but sees the balance of risks leaning towards higher prices.
At the centre of Goldman’s analysis is the question of how high prices would need to go to keep Europe supplied. In a scenario combining low supply with average winter weather, the bank estimates TTF would have to rally to a peak of around 105 euros/MWh. At that level, enough LNG demand elsewhere in the world would be priced out to free up cargoes for Europe. In practice, Europe would need to outbid other buyers, mainly in Asia, for a limited pool of seaborne gas.
Weather adds another layer of uncertainty. Goldman said uncertainty over winter conditions widens the range of possible outcomes further. A cold winter would accelerate storage withdrawals and intensify competition for cargoes, while a mild one would ease pressure on both inventories and prices.
The drop in Middle East LNG exports links the European gas market directly to the conflict in the region, which has already disrupted crude flows and shipping. Goldman’s assessment suggests gas traders will be watching Gulf export volumes and weather forecasts closely. With storage starting from a low base, Europe has less room to absorb either a supply shock or a cold snap than in a typical year, and the path of TTF this winter is likely to depend on how both develop.
Explainer: Understanding European gas pricing
TTF (Title Transfer Facility)
The Dutch virtual trading hub for natural gas. TTF futures are Europe’s main benchmark for wholesale gas prices, much as Brent is for crude oil. When analysts quote “European gas prices,” they usually mean the front-month TTF contract.
EUR/MWh (euros per megawatt hour)
The unit TTF is priced in. A megawatt hour measures the energy content of the gas, not its volume, so the price reflects the energy delivered. As a rough guide, a move from 70 to 85 euros/MWh is an increase of a little over 20% in the wholesale cost of that energy.
LNG (liquefied natural gas)
Natural gas cooled to a liquid so it can be shipped by tanker. Europe relies heavily on LNG imports, which means it competes with buyers worldwide, particularly in Asia, for the same cargoes.
Demand destruction
The point at which prices rise high enough that some buyers cut back or switch fuels. Goldman’s 105 euro estimate is the level at which enough buyers outside Europe would step back to leave sufficient LNG for European needs.
Injection and withdrawal seasons
Europe typically injects gas into storage in the warmer months and draws it down over winter. Inventory levels going into winter are a key gauge of how well supplied the region is.
Sequential drop
A decline compared with the previous period, here month-on-month, rather than year-on-year.
This article was written by Eamonn Sheridan at investinglive.com.