HSBC analysts provided a detailed outlook on natural gas prices in a note this week, indicating that the European gas market is approaching a new equilibrium.
In recent weeks, gas prices have been stronger than expected, with the Title Transfer Facility (TTF) benchmark surpassing USD 10/mBtu, the highest since January. According to the bank, supply disruptions, such as the prolonged outage at Freeport LNG and maintenance at Gorgon, along with geopolitical risks, have contributed to this increase.
Despite these issues, analysts note that European inventories are well stocked, with current levels at 64% capacity compared to a historical average of 43%. The demand for gas remains low, with non-gas power generation being robust, suggesting only a minor downside to gas prices if geopolitical tensions ease. HSBC maintains a USD 9/mBtu assumption for the summer of 2024.
The bank's analysts stated: "Europe's gas market is well on its way to finding a new normal, two years after Russia's invasion of Ukraine."
Even so, the winter of 2024/25 is expected to be the last challenging period for Europe before new LNG supplies come online between 2025 and 2028, primarily from the US and Qatar.
This influx of LNG is anticipated to lead to an oversupply in the market starting in 2026, potentially lasting until the end of the decade. The timing of this glut is uncertain, but HSBC foresees it being highly likely given the firm supply growth from key producers.
In the long term, the market is expected to rebalance with increased LNG demand from price-sensitive Asian countries and reduced flexible US exports. This could lead to lower summer prices, potentially dropping to US LNG cash costs of approximately USD 5-6/mBtu.