Introduction#

Goldman Sachs has forecasted that European gas prices are likely to increase in the second quarter of the year. This rise is attributed to supply disruptions and changes in liquefied natural gas (LNG) flows affecting the market.

Supply Disruptions#

Currently, about 80 million tonnes per annum (mtpa) of LNG supply, which is roughly 19% of the global supply, is offline. This situation has arisen due to halted flows through the Strait of Hormuz and the shutdown of a major LNG production site in Qatar. The bank's strategists, led by Samantha Dart, noted that LNG flows through the Strait of Hormuz have been non-existent since the onset of the Iran conflict.

Market Conditions#

Despite relatively stable northwest European storage levels, which have benefited from mild weather and steady LNG imports, Goldman Sachs anticipates a shift in market dynamics. As temperatures become more seasonal and LNG shipments are diverted to Asia, the physical supply balance in Europe is expected to tighten. This tightening has already led to a significant reduction in regional gas demand, with a decrease of over 20 million cubic meters per day due to gas-to-coal switching prompted by rising prices.

Price Forecast#

Goldman Sachs predicts that this tightening could lead to a further increase in the Title Transfer Facility (TTF) prices, which are currently around 51 EUR/MWh. They expect these prices to rise into the range of 57 to 84 EUR/MWh. The bank maintains a second-quarter forecast for TTF at 63 EUR/MWh, suggesting that current prices might balance the market if Qatari supply resumes by early May. However, if disruptions continue, prices may need to rise further to curb demand.

Limited Options#

The options to mitigate the supply shock appear limited, as there are no alternative routes for LNG that previously passed through the Strait of Hormuz. Increases in Norwegian gas output or adjustments elsewhere are unlikely to significantly compensate for the lost supply. Additionally, European storage levels are currently low, at just 18% of capacity, the lowest for this time of year since 2018. With limited injections expected in April, Goldman estimates a build of only about 0.6 billion cubic meters, significantly lower than previous years. Without a swift resolution to the ongoing conflict, imminent physical tightening in Europe is likely to drive further price increases.