Sumary of Goldman Tells Hedge Funds How To Profit From Europe’s Gas Price Hyperinflation, Warns Of Blackouts:
- A quick big picture recap for those who have missed the biggest move in gas prices in history, here is a quick primer.
- Over the past month, European natural gas prices have rallied more than 40% and more than 14% this week – to a record-high 22/mmBtu.
- While NW European gas inventories are at record-low levels for this time of the year, there have been no significant changes to fundamentals in recent days and the Oct-Jan spread has remained virtually flat in this latest rally.
- This suggests that current prices reflect not only the tight current balances in NW Europe, but also a growing winter risk premium, which according to Goldman is near $3/mmBtu, to price a probability that regional gas prices will need to incentivize demand destruction and/or attract incremental LNG this winter.
- Northwest European gas inventories, currently 24% below average, have been tight since the beginning of this summer, when the region experienced two consecutive cold weather events in April and May.
- The meaningful rally seen in TTF prices as a response to these exceptionally low levels of gas storage has led to higher supply and lower demand of gas this summer.
- On the demand side, the main response to higher prices has come from power burns, down 38 mcm/d year-on-year on average since June (19 mcm/d of that driven by price-driven gas-to-coal (G2C) substitution, the remainder by higher nuclear generation) despite higher total load and lower-than-expected wind generation(Exhibit 7).
- Realized data suggest industrial demand for gas has also dropped driven by higher prices, though the magnitude of the impact has been significantly smaller than what we have observed for power burns, at about 7 mcm/d.