Goldman flags upside to 70-euro TTF gas forecast, sees possible 105-euro peak

Europe's natural gas market is moving in lockstep with the crude market because of the same Gulf supply disruption, meaning further escalation in the Middle East would raise the risk premium on both energy types at once. Should Europe be forced to compete more aggressively for LNG cargoes during the winter months, the pain would be greatest for the most price-sensitive buyers in Asia and other emerging economies, which would tighten conditions across the global market. A rise in gas prices would also bleed into power bills and industrial profit margins in Europe, stoking inflation. With the balance of risks skewed upward, the economics of substituting oil products for gas become more attractive wherever that switch is possible, giving a small extra lift to diesel and fuel-oil demand.

In Goldman's base scenario, European gas still softens to 70 euros, yet the direction of risk is toward higher prices given depleted stockpiles and reduced LNG volumes out of the Middle East.

At a glance:

• Goldman Sachs believes its year-end TTF forecast of 70 euros per megawatt hour carries more upside than downside risk.
• TTF has been propped up in the mid-80s by weak European storage and a drop from the prior month in LNG shipments out of the Middle East.
• With low supply and normal weather, the bank calculates winter TTF would have to reach about 105 euros/MWh so that LNG demand elsewhere would fall by enough to make room for Europe.
• Goldman also notes that unpredictable weather in winter expands the spread of possible price outcomes.

Goldman Sachs sees its year-end projection for European natural gas prices as more likely to be exceeded than undershot, because stocks are low and Middle East LNG exports have been falling as winter nears.

The lender expects the Dutch TTF reference price to be at 70 euros per megawatt hour when the year ends. That is far under the current market; Goldman attributes the gap to low reserves and a period-on-period decrease in Mideast LNG export volumes keeping the benchmark in the mid-80s. The difference shows the bank's base case still calls for some softening, even though it judges the risk balance as pointing upward.

Goldman's central question is what price level would be sufficient to keep Europe adequately supplied. The bank's model sees TTF spiking to about 105 euros/MWh in a low-supply winter with normal weather. Only once the benchmark reached that point would enough non-European LNG buyers be pushed to the sidelines to release cargoes for Europe. In reality, Europe would have to top competing purchasers, chiefly Asian importers, for a constrained supply of gas carried by sea.

Weather introduces more unpredictability. As Goldman put it, uncertainty about winter conditions stretches the likely outcomes even wider. Storage drawdowns would speed up and bidding for cargoes get more intense during a cold winter, whereas a mild season would relax the strain on both stockpiles and prices.

Because exports of Middle East LNG have fallen, Europe's gas market is now directly caught up in the same regional conflict that has already hit crude shipments and maritime traffic. Goldman's analysis points to gas traders keeping a close eye on Gulf export data and weather predictions. With storage beginning from a low point, Europe can handle a supply disruption or a sudden cold spell with less slack than usual, leaving the trajectory of TTF this winter probably tied to those two factors.

Explainer: A guide to European gas pricing

TTF (Title Transfer Facility)
A Dutch virtual marketplace where natural gas is traded. The futures contracts for TTF are the principal reference for wholesale gas in Europe, in the same way Brent serves for crude. The phrase “European gas prices” in analyst commentary normally refers to the front-month TTF contract.

EUR/MWh (euros per megawatt hour)
TTF is quoted in this unit. A megawatt hour corresponds to the energy content of the gas rather than its physical volume, so what is being priced is the energy supplied. For a sense of scale, moving from 70 to 85 euros/MWh raises the wholesale energy cost by just over 20%.

LNG (liquefied natural gas)
This is gas chilled into liquid form for transport by sea. European supply depends substantially on LNG brought in from abroad, putting the region in direct competition with importers around the world, especially Asia, for the same shipments.

Demand destruction
The threshold where prices climb far enough that certain consumers reduce usage or move to alternative fuels. The figure of 105 euros cited by Goldman represents the point at which enough non-European purchasers would pull away for Europe to have adequate LNG.

Injection and withdrawal seasons
Stockpiles are typically built up during the warmer part of the year and then consumed over the winter heating season. How full European storage is at the start of winter is a telling indicator of supply security.

Sequential drop
A decrease measured against the immediately preceding period, in this instance from one month to the next, as opposed to the same month a year earlier.