European natural gas prices fell after Goldman Sachs warned of possible downward pressure on prices that have recently surged to their highest levels this year.
Benchmark futures fell about 2.7% in early trading on Wednesday, with the bank’s analysts predicting that prices could fall by about half from their current levels if Russian gas continues to flow into the market at a higher rate than expected.
Goldman’s baseline scenario assumes that Russian gas will stop flowing through Ukrainian pipelines once the current transit agreement between the two countries expires at the end of this year, analyst Samantha Dart explained in a research note.
“Any change in the status quo could result in Russian supplies exceeding expectations, which could push global gas prices lower,” She noted.
The market reacted quickly to news of a possible deal in September, with prices temporarily falling by about 9.1% following a media report about talks to transport Azerbaijani gas through Ukrainian pipelines. However, no agreement has been reached yet.
Prices could fall further if Russia is allowed to supply limited amounts of LNG from its new Arctic LNG 2 facility, which is under US sanctions, Dart added. These scenarios could push gas prices to as low as €20 per megawatt hour, making them competitive with lignite coal for power generation, she said.
Gas storage facilities in Europe are 95% full, with heating demand falling due to unprecedentedly mild weather. High levels of renewable energy production are also helping to limit gas consumption, while LNG imports are lower than last year.
Prices have seen additional downward pressure this week as tensions in the Middle East ease, although traders remain on the lookout for potential disruptions.
The nearest-month futures contract on the Dutch gas market, Europe's gas benchmark, fell 2.3% to €41.90 per megawatt hour, after prices hit their highest since December on Tuesday.
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