What’s going on on the natural gas market? Prices, trends and events in Q3 2023

September 2023 was a month full of events on the Polish gas market. We are approaching the key autumn-winter period of the year. This is statistically the most expensive season due to the increased demand for gas for heating purposes.

One of the main events on the gas market in September was the threat of a strike by employees of the LNG sector in Australia (concerning Chevron), which, if production was completely suspended, could affect approximately 7% of the global LNG gas supply (liquefied natural gas). ). Fortunately for customers, the LNG loading schedule was not disrupted. Ultimately, the strike ended after Chevron and Offshore Alliance accepted new proposals regarding employment conditions. These events, although they did not directly concern the Polish market, significantly contributed to price volatility on the Dutch TTF exchange, which is a reference point for European countries. Prices ranged from EUR 47.65/MWh to EUR 53.10/MWh, which means a volatility of 11%. In summary, the Chevron workers' strike had a potential impact on global LNG supply and gas prices, but ultimately did not significantly impact the market due to the quick resolution of the conflict.

Although demand for gas in the industrial sector remains depressed compared to previous years, it continued its upward trend. According to data from the first half of August, demand increased by 25% y/y. This is a large increase, but one should remember the low base effect from last year (it was still 4% below the five-year average). In July, however, it was as much as 12% below the average. This allows, despite reduced import capacity, to fill warehouses that are filled to a record level both in Poland and in other European countries. It is worth noting that the warehouses of this raw material in Ukraine are also being filled intensively.

A graph illustrating the amount of gas imported into the EU highlights several key points. The volume of imported gas is at a very low level, below the average from 2015-2020, which indicates a reduced dependence on gas supplies. Despite this, the European Union is still not fully independent from Russia. Other sources of supply are not able to provide the capacity guaranteed by Gazprom. Gas from Russia still reaches the EU, but mainly in the form of LNG, which is not subject to sanctions. The largest share in total imports (approx. 42%) is LNG. The second largest supplier is Norway, which supplies approximately 23% of total imports. Changes in the import structure took place mainly at the expense of Russia, which in 2020 supplied over half of the gas to the EU. European countries, becoming independent from gas imports from the East and wanting to ensure energy security in the future, have intensified their efforts to expand LNG reception infrastructure from 2022 to fill the supply gap.

Surplus gas is being stored, leading to record levels of storage capacity at this stage of the year. As of September 26, 2023, the occupancy rate was 97.6% for Poland and 95.1% for the European Union. However, the favorable demand-supply situation can change quickly. The recovery of demand for gas, especially in the industrial sector, combined with a slight increase in imports, will be a strong impulse to increase prices. To sum up, the natural gas market in Poland and Europe is influenced by many factors - both global and local. High gas prices, reduced demand and increasing LNG supply are just some of them.

Looking at the Polish TGE exchange, on the last day of September, futures prices were set at PLN 244.85/MWh for 2024, while for 2025 the price was PLN 240.35/MWh. Compared to the last day of August, we see a price drop of PLN 18.33/MWh (7.5%) and PLN 3.98/MWh (1.7%), respectively.

Quarterly gas contracts are attractively priced, but involve some risk. A strategy based on these products can bring financial benefits, but you should be aware of the potential risks. The closest quarterly product available for purchase, Q1 2024, is valued at PLN 246.20/MWh, which is only PLN 2/MWh higher than the valuation of the annual product for 2024. Taking into account that the first quarter is usually the most expensive period of the year on the gas market , such a valuation seems very attractive. Analysis of prices of quarters available on the market and observations from 2023 suggest that delaying the purchase/setting the price and abandoning annual products in favor of quarterly ones may be financially beneficial. However, there are significant risks. With the current low gas prices, there is a possibility of their increase. Additionally, the liquidity of products for delivery in subsequent quarters is limited. Currently, it is possible to conclude a contract with delivery in the third quarter of 2024 at the latest. In the event of price increases, purchasing a contract with a one-year delivery allows you to secure the price for the entire portfolio. Quarterly contracts do not offer this security. Price hedging for Q4 will only be possible after trading in these products begins. This should take place a year in advance (trading for Q4 2024 begins in October 2023), but the experience from this year shows that there is a lack of liquidity on the stock exchange and such transactions are not concluded. In the case of an upward trend, the recipient may be forced to passively observe the growth and wait for the opportunity to conclude the first transaction.

Reducing demand for gas was a key factor contributing to the decline in prices following the energy crisis in 2022. This trend persists not only in Poland, but also throughout Europe. We note that gas consumption is lower for the second year in a row, both in the industrial sector and among individual customers. High prices effectively inhibit demand. Additionally, the deterioration of the economic situation in many countries, decline in orders and production lead to lower consumption. If the dynamics of LNG supplies remains at the current level, a possible recovery of demand could be an important growth factor for natural gas prices. In such a scenario, we could observe a gradual increase in gas prices on the market. It is worth noting, however, that despite reduced demand, Poland is still expanding its LNG infrastructure. In 2023, Poland signed agreements to expand the LNG terminal in Świnoujście to 8.3 billion m3 per year by 2023, in response to growing domestic demand. At the same time, Poland plans to build another gas terminal (it will be a floating FSRU terminal in Gdańsk). According to Gaz-System, the FSRU terminal in Gdańsk will be adapted to regasification at a level of approximately 6.1 billion m3 of raw material per year.

Moreover, according to Gaz-System forecasts, gas consumption in Poland may decline by 4% annually to 14.8 billion m3 in 2023 from 15.4 billion m3 in 2022 and 18.4 billion m3 in 2021.