The reality is that Europe's gas storage situation is far from dire. We have already written about this in the past, but here's an updated chart:
Source: Giovanni Staunovo
As you can see from the chart above, despite the lower exports from Russia, European gas storage has managed to match the 5-year average for this time of the year. For some readers, you may question the logic here. How is it possible that Europe's gas storage is filling faster than the 5-year average despite lower supplies? It's because of demand destruction. We are already seeing EU businesses being massively impacted by the surging prices, and so the demand destruction has resulted in the injection rate being higher than average.
So why are European gas prices and electricity prices surging? As we wrote before, the obvious answer is that the market is doing what it needs to balance the market. In this case, since supply is inelastic, demand is the only way we can balance the equation. In addition, traders view Europe as a one-way bet since supply is fixed/moving lower and the possibility of a colder than normal winter on the horizon could still result in a material deficit. This means that traders could push the boundaries to the extreme without any near-term ramifications. The problem, however, and as illustrated in the chart above, is that the rise in price has in effect accomplished the near-term goal. With the winter heating demand season still 3 months away, the market will have ample time to bet on the possibility of a colder than normal winter later on.
In the meantime, we think the recent frenzy is coming to an end. The reality is that Europe is ok from now to November, which at some point during this 3 month period will see European gas prices pull back severely. This means US gas prices will also be materially impacted since the recent uplift came as a result of European gas prices going parabolic.
In addition, today's sudden reversal in TTF is another cause for alarm, and such large declines usually signal trend exhaustion.
Fast forwarding to today, European gas prices have meaningfully corrected from the highs. We are also seeing some people on Twitter talk about how the energy crisis has ended. This type of swing in emotions in the market shouldn't be new to anyone that follows natural gas. It's the widowmaker for a reason. And despite the newfound pessimism in European gas prices, winter is coming, and those that think otherwise will be in for a rude awakening.
The recent drop in EU gas prices has had negative pressure on US gas prices. Two weeks ago, we had thought US gas prices bottomed close to $6.6/MMBtu, but as of today, Henry Hub is trading at $5.75/MMBtu.
Our view is that the bearishness is overdone. Consider the following:
