European gas futures prices have plunged in recent days, with some contracts briefly falling into negative territory, amid a build-up of reserves and warmer than expected weather.

The United States, which exports most of its natural gas to Europe, will soon face a surplus. The main producer of natural gas in the US state of Texas is producing more gas than the network can handle, and the producer price of natural gas has fallen into negative territory as of press time.

There are concerns in the industry, as European gas reserves further increase, negative futures prices will intensify.

Europe's gas tanks will be full

It is difficult for LNG ships to unload

Gas storage in Europe is now more than 90 per cent full, and in the main centres of France, Italy and Spain it is close to 100 per cent full. That has left some of the gas shipped by sea with nowhere to go, while the glut of LNG elsewhere is likely to worsen in the next two to three weeks. Because 60 liquefied natural gas (ING) cargo ships have been cruising slowly around northwest Europe, the Mediterranean and the Iberian Peninsula.

This comes after European countries procured large quantities of liquefied natural gas (LNG) after the European Commission in June ordered countries to start storing gas earlier than planned. Germany has passed legislation to set targets for gas storage. Germany had planned to reach its target of 95 per cent full gas storage by November 1, but reached that target ahead of schedule on October 14. At full capacity, Germany's gas reserves could supply 256 trillion watt-hours of electricity equivalent, or roughly a quarter of the country's annual energy consumption, according to the German Energy Storage Initiative.

On October 24, the main European TTF gas futures contract fell to 96.5 euros/MWH, down 15% in a single day, hitting a four-month low, with some contracts briefly falling into negative territory. Just two months ago, on August 26, the contract was as high as €346.5 / MWH, representing a decline of about 70 per cent in two months. Despite this dramatic short-term decline, European energy prices are still about three times higher than their five-year average for this time of year.

Some European gas traders believe unusually high temperatures could reduce consumer demand for gas, easing pressure on Europe's fuel supplies. There are concerns that too many speculative LNG ships heading for Europe could lead to a major local glut of natural gas, triggering further price collapses in spot and even futures.

Warm weather is forecast for much of the continent at the end of the month and major European cities are expected to experience much warmer than normal temperatures as the heating season begins, according to weather forecasts.

According to the German weather service, the number of heating degree-days between October 29 and November 2 will be 27.4, well below the average of 44.1 over the past decade. It is understood that the number of heating degree-days is a measure of energy demand, and the higher the number, the more fuel is needed for heating.

U.S. natural gas futures prices

There have been many negative numbers

It is understood that the European Union mainly relies on liquefied natural gas from the United States to store gas. Nearly 70% of the 6.3 million tons of liquefied natural gas shipped out of U.S. ports in September was bound for Europe, according to financial-information services provider Refinitiv, making U.S. suppliers rich.

But as Europe's gas gasholder is full of, in the United States is beginning to show the influence of gas origin, the main oil and gas production - in west Texas Permian basin gas prices continue to fall sharply, Beijing standard time on October 25th evening, as of press time, the market price has fallen to a negative value, for the first time for the last two years.

Most of the gas production in the Permian Basin in Texas is associated gas, a byproduct of the extraction of crude oil. When pipelines get full and can't handle any more gas, companies often burn off excess gas so they don't have to reduce or stop oil production. And the region has a long history of pipeline capacity problems, with the recent price plunge tied to planned repairs to two key gas pipelines owned by Kinder Morgan Inc., North America's largest energy-infrastructure company.

Note that the main NYmex natural gas futures contract, the benchmark price for natural gas in the United States, is trading around $5.20, with its main delivery area at the Henry Hub. Currently, forward contracts for U.S. natural gas futures are generally cheaper than front-month contracts.

So will U.S. natural gas futures go negative? In fact, U.S. natural gas futures have fallen into negative territory several times before. On April 22, 2019, natural gas prices fell to -40 cents per mmBtu. Gas prices in the Waha Center, a source of U.S. natural gas, have gone even further into negative territory, hitting a record of -$10 per mmBtu in a single transaction on April 20, 2020.

Chemical giants have been cutting production, and many domestic industries are struggling

The capital market a green at the same time, the chemical industry also keenly smelled the energy crisis. The conflict between Russia and Ukraine has been going on for nearly eight months and has become a global crisis. Now that Russia has cut off some or all of the gas in 13 EU member states, the EU may prioritise reducing gas use in the industrial sector. Under pressure from the shortage of raw materials, European chemical giants have been forced to cut or even halt production.

'We are reducing production at facilities that require a lot of natural gas, such as ammonia plants,' BASF said. Yara of Norway announced that it was implementing further production cuts that would reduce its total capacity utilisation of synthetic ammonia in Europe to about 35 per cent, equivalent to 3.1m tonnes of ammonia and 4m tonnes of finished products. Nordica is shutting down production at some European chemical plants for economic reasons, and the reduction in plant operations is expected to continue this winter. In addition, Germany's Kostron, Evonik Industrial and other chemical companies have also reduced production.

There is already a shortage of raw materials in Le Havre and Lyon due to the disruption of oil and gas supplies from Russia. Exxonmobil's Gravenchon and Total Normandy's installations in Le Havre have been stopped. Exxonmobil's Fos unit and Total's Feyzin unit are also currently idle, with petrol and diesel stations running out of stock in some parts of France.

The European Union is the world's second largest chemical production region, home to BASF, Air Liquide, Bayer, Kostron, Lanxess and many other chemical giants. Among the top 50 global chemical companies in 2022, 18 are in Europe, and the reduction in production is expected to have an impact on the supply of basic chemical raw materials.

Chemical products produced in Europe mainly flow to Northeast Asia, Southeast Asia, the Middle East and North America. Some chemicals have A leading role in the global market, such as MDI, TDI, phenol, octanol, high-end polyethylene, high-end polypropylene, propylene oxide, potassium chloride A, vitamin E, methionine, butadiene, acetone, PC, neopentyl glycol, EVA, styrene, polyether polyol, etc.

Energy shortages in Europe will lead directly to soaring costs and severely constrained operations in chemical manufacturing. Energy shortages and high costs may lead to passive load shedding at local chemical installations, creating a large supply gap for chemicals and further driving up local prices sharply. Germany's National Academy of Sciences has warned that the country's basic industries, especially chemicals, are coming to an end because of the energy crisis.

For the domestic chemical industry, the spread of the low-end industrial chain and the serious dependence of the high-end industrial chain on overseas have existed for a long time. The current situation is undoubtedly anxious. Whether it is the soluble additive, Yan seasoning, film forming material and so on in the paint industry, or more than 50% of the new chemical materials vacancy in our country, are behind the overseas chemical giants "blocked" the insider.

Oil and gas, not only energy, but also the main raw materials of the chemical industry. In addition, the energy crisis brought about by the rise in gas prices, electricity prices is also an unavoidable side effect. The escalation of the conflict between Russia and Ukraine and the intensification of the energy crisis, as well as the continuous "tightening" of the supply side of the leading overseas chemical industry, have also become another powerful driving force for the increasing anxiety of the chemical industry under the current devaluation of the domestic currency and the soaring expectation of global economic recession. What is more serious is that under the failure of the basic chemical industry chain to operate normally, the downstream automobile, real estate and industries closely related to people's lives will be affected by the domino effect, and face the severe test of life and death, such as the shortage of raw materials and the restriction of construction.

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