Market mostly pessimistic on EU industrial gas demand

Many market participants doubt that EU industrial gas demand will ever recover to pre-2022 levels, trading firms and analysts have told Argus.

Industrial demand has picked up slightly so far this year from its nadir in 2022, but it remains significantly below levels before Russia's invasion of Ukraine, market participants said. One trading company estimated the gap at 8-10pc, saying low economic activity and high interest rates have stalled investments and limited gas usage. Low European purchasing managers' indexes also point towards low industrial demand, another trading source said.

The EU's two most price-sensitive industries — chemicals and refining — each have struggled, but the former has found it difficult to replace gas as a feedstock, while conversely, refineries can switch fairly easily to using LPG, market participants said. This has led to production cuts in the chemical sector and gas-to-LPG switching in refineries.

High price volatility over the past two years has caused some industrial users to "lose faith" in gas, one trading source said, adding that no other commodity had shown such large price swings over such a short period of time. And many firms' investments in alternative fuel systems probably have permanently removed some gas demand, they said. EU industries are looking for attractive prices over extended periods, not just in the short term, but the EU does not offer this at present, an analyst said. And the EU discourages signing new long-term LNG contracts, as opposed to Asian countries, which recently have signed several such agreements, a trading firm said.

Possible upside

Despite the challenges facing EU industries, one analyst said manufacturing stocks may have bottomed out and companies may soon begin restocking.

Industrial gas demand "might actually surprise on the upside a little", although ongoing volatility at the Netherlands' TTF hub is "somewhat of a turn-off", they said. Industrial gas demand also could rise to some degree if industrial users coming off fixed-price contracts signed at the height of the gas price spike last year agree to lower prices, trading firms said. But users with longer-term fixed contracts signed before prices soared could face sharply higher prices when their existing deals expire, trading companies said, and this could counteract this effect.

The forward curve suggests gas is more expensive than other fuels for EU refiners and imported ammonia also may be cheaper than domestically produced supply, an analyst said.

In any case, weather will determine a significant portion of EU gas demand this year as a cold snap could drive up prices, trading firms said. "Ninety percent is in the hands of Mother Nature," a trading company said. "If the winter is warm, all is good. Storages end with high levels and we should see lower gas prices next spring or summer. If it is cold, then vice versa."

By Brendan A'Hearn