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High gas prices cause first signs of demand destruction in European industry

Published by , Editorial Assistant
World Pipelines,

Fertilizer producer Yara has announced a curtailment of their urea-ammonia production units in Italy and France, citing high gas prices. This marks the first major announcement of industrial demand destruction, and others may follow suit if prices persist at their current exorbitant levels.

TTF prices trading at ~$57/million Btu today likely depict the market sentiment better aligning with the prevailing bearish fundamentals. In the absence of an escalating geopolitical development, we expect this sentiment will continue to govern near-term price movements, though we would similarly need to see a material de-escalation in Ukraine before we can expect a sharp downward correction.

Russian gas flows to Europe remain stable at around 254 million m3/d, with the Yamal-Europe pipeline operating in Westbound mode. Flows through Ukraine remain defiantly stable as well, at around 80 million m3/d.

We may see bullish pressure later in the year as the EU has aimed to mandate filling their gas storage to 90% capacity before October. This would require over 80 billion m3 of injections between April through September, suggesting sustained re-stocking demand for months on end. This is likely to be an uphill battle if purchases from Russia are suspended in the months ahead.

The market is now looking ahead to the end of the winter season. Forecasts point to comfortably above normal temperatures, and wind generation is set to surge.

That said, the geopolitical risk premium in oil prices continues to provide bullish support to gas. The US’ ban on Russian energy imports is largely seen as symbolic given their limited dependence compared to Europe, but nevertheless shows that energy sanctions remain on the table and could be deployed if the war escalates further.

In Asia, Japan and South Korean LNG inventories are likely running low, which may soon trigger re-stocking demand. However, we expect buyers to put off outright purchases for as long as possible until prices return to more palatable levels. Temperatures trending above normal are a welcome bearish signal.

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