Industry may respond little to TTF 3Q gas price drop

Tumbling gas prices are unlikely to spur much of an increase in Europe's industrial gas demand over the rest of this summer, because of persistent wider economic pressures.

European prompt and near-curve gas prices have fallen steadily in recent weeks, as weak demand and plentiful supply has pushed up underground storage inventories that had entered the summer far above normal. The third-quarter contract at the most liquid hub, the Dutch TTF, has moved below €28/MWh in recent days, down from over €40/MWh in late April and above €100/MWh in late December. This is considerably below the average TTF everyday market of roughly €196/MWh in July-September.

But even if gas prices fall much further, there is limited potential for this to stimulate a significant near-term recovery in industrial gas demand. This means that the global gas market will need to balance this summer through other means, such as global LNG prices falling enough to spur extra LNG demand outside of Europe.

In some sectors such as fertilisers and refining, the recent fall in gas prices has already triggered higher output and with it greater gas demand — aggregate industrial gas consumption in Europe has increased in recent months. But there is limited scope for a further increase this summer, even if gas prices fall a lot further.

If TTF prices continue lower, this may encourage ammonia plant operators to increase production from units that are still running at reduced rates. But restarting idled plants is a weeks-long process, and operators are unlikely to take this step unless the structural situation changes. And even if TTF prices decrease enough to make domestic ammonia production competitive with imports again — having been largely uncompetitive since mid-2022 — the EU has in any case nearly finished its fertiliser imports for planting this season. European fertiliser demand reaches an annual low in the third quarter, with the next wave of farm demand to come only in February.

Meanwhile, there is limited potential for falling gas prices to push up gas use in the refining sector any further. High margins for gasoline and diesel means that refineries are running close to capacity, while there has already been a switch to back to gas as a feedstock from alternative fuels.

A further fall in gas prices might incentivise higher operating rates at secondary refining units that use hydrogen to produce diesel from steam cracking. But given that gas prices have already dropped recently and the continent faces a deficit of diesel, exacerbated by the loss of Russian supply, hydrocracker run rates may already be topping out.

Desulphurisation of transport fuels becomes cheaper as gas prices fall, which may boost demand to run sour crude grades at refineries. But sour crude grades' discount to sweet crudes have narrowed recently, which takes away much of the cost saving from running typically cheaper, more sulphurous crudes.

In other sectors, stubbornly weak downstream demand because of wider economic pressures means there is little potential for a near-term increase in output.

Europe's petrochemicals production has been running around 30pc below capacity since the second half of last year. Imports of chemicals, intermediates, semi-finished and finished goods have played a part, as has destocking throughout the value chain. But reduced output is largely down to low demand in Europe, triggered by the effects of inflation and a cost-of-living squeeze on demand.

Demand has remained weak in the second quarter, despite much lower prices during a usually busy season for the industry, which some in the sector take to mean that demand may remain subdued for the rest of the year.

Gas prices are similarly yet to provide much of a boost to European nonferrous metals production. Much of Europe's production capacity is still idled or operating at reduced rates because of low downstream demand, and there is little expectation in the market of an uptick in the near term. Steelmakers are yet to ramp feedstock purchases back up, while production in the highly energy-intensive glass sector has been subdued.