TTF gas price index has reached almost 27 EUR / MWh, the price of electricity in Germany is 70 EUR / MWh, and the price of carbon allowances is constantly breaking new records and exceeding 55 EUR / t. What’s going on? Here are the main reasons:

Low storage inventory levels

The summer season began with extremely low storage inventory levels. Extremely cold weather that lasted until late spring led to a higher demand for heating and a reduction in storage stocks to 30% of the total available capacity, which we have not seen since 2018. By comparison, at similar times last year, the storage levels were at 60% of the available capacity compared to a five-year average of 40%. This factor will remain one of the main engines of high prices until the storage facilities are filled to a level that will seem sufficient to market participants to start the winter season of 2021.

Record high carbon prices

Another crucial factor that has a significant impact on rising gas prices is the price of emission allowances (i.e. “carbon prices”). Carbon prices rose to record highs in May this year, crossing the 55 EUR / t mark from 16 EUR / t in March last year.

Carbon prices have a significant impact on natural gas prices as they make coal-fired power plants less competitive compared to gas turbines, leading to a shift to natural gas, increasing gas demand and driving up prices.

The rise in carbon prices is a direct response to the European Union’s policy to drastically reduce emissions to neutral levels by 2050. Thus, it is estimated that prices should remain high in the future as well.

Supply restrictions

Supply from Europe’s two largest pipeline suppliers, Russia and Norway, is not increasing together with prices. This puts even more positive pressure on prices.

In case of Norway, the decrease in supply is due to major maintenances in the second quarter of 2021. In case of Russia, flows through Ukraine have declined since the transit agreement came into force. Decisions on flows from Russia may also be influenced by political nuances regarding Nordstream 2 to ensure its launch. Natural gas production is also declining sharply in the Netherlands, where one of the large natural gas fields in Groningen is expected to be closed by mid-2022.

Asian demand

The demand for LNG in Asian markets is also an important factor for Europe as it greatly impacts the flexibility of LNG supply to Europe. Given a rapid recovery in the Asian economy this year, especially in China, the demand for natural gas is increasing.

There are number of forecasts saying that this demand will grow even stronger in the summer. Recently Asian LNG imports have risen by 3.5 percent, while Europe’s has fallen by 4 percent. China’s LNG demand alone grew by 13.5 percent, compared to just 6 percent in 2019.

Hence, due to all these factors, the price curve of TTF index looks unusual – instead of seasonally lower summer prices TTF futures curve remains high. As gas injections into storage facilities increase and weather gets warmer prices are likely to fall slightly, but a strong Asian market and high carbon prices will put upward pressure on prices.