Goldman Sachs: Why European Natural Gas Could Fall by 50%

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Here’s a challenge to the conventional wisdom, courtesy of

Goldman Sachs

: Europe has “solved” its winter natural-gas crisis, and prices could drop by half in the next six months.

The fuel’s cost has soared, setting records in Europe last month, just before Russia shut the Nord Stream 1 pipeline to Germany. Some analysts expect European power bills to triple early next year, necessitating government bailouts. Traders expect prices to stay high into 2023, moderating slightly by year end. Gas futures for 2023’s first quarter are trading at 199.50 euros ($199.05) per megawatt hour.

But Goldman analyst Samantha Dart sees prices falling below €100 in 2023’s first quarter. Europe, she says, has built storage to 82% of capacity—and will exceed 90% by the end of October. Europeans are using less gas, because of new rules and a slowing economy. There are caveats. Winter could be harsh, forcing countries to use more gas for heat. Russia could curtail more gas, such as supplies to Italy. And consumer subsidies could encourage gas consumption.

Next summer could be tough. Storage will fall to 22% after winter, she says, forcing countries to buy pricier fuel, likely imported liquefied natural gas. So, prices might rise to €235 per megawatt hour—higher than traders expect.

U.S. prices are lower than Europe’s, but they’ve still tripled from long-term averages. Some analysts see prices on this side of the Atlantic also falling. With exports limited, U.S. producers will largely be supplying the domestic market, where there’s a relative gas glut. It makes no sense that prices here would swing dramatically on changes in Europe, writes RBC Capital Markets analyst Christopher Louney, because the U.S. can’t increase exports.

Next Week

Monday 9/19

AutoZone

reports fourth-quarter fiscal-2022 results.

The National Association of Home Builders releases its Housing Market Index for September. Economists forecast a 48.5 reading, about even with the August data. The index has fallen every month this year and in August breached the key break-even measure of 50 for the first time since May of 2020.

Tuesday 9/20

The Census Bureau reports new residential construction statistics for August. Expectations are for a seasonally adjusted annual rate of 1.45 million privately owned housing starts, matching the July figure.

Wednesday 9/21

The National Association of Realtors reports existing-home sales for August. Consensus estimate is for a seasonally adjusted annual rate of 4.7 million existing homes sold, about 100,000 fewer than in July.

General Mills

and

Lennar

release earnings.

Salesforce

and

W.W. Grainger

host investor days.

The Federal Open Market Committee announces its monetary-policy decision. Just two weeks ago, Wall Street was debating whether the FOMC would raise the federal-funds rate by 50 or 75 basis points. After another strong jobs report and a hotter-than-expected print for the August consumer price index, a three-quarters of a percentage point interest-rate hike seems all but assured. That would bring the fed-funds rate to 3.0%-3.25%. Traders are even pricing in a 25% chance that the central bank will raise its key short-term rate by a full percentage point, which would be the largest move in nearly four decades.

Thursday 9/22

Accenture
,

Costco Wholesale
,

Darden Restaurants
,
FactSet Research Systems, and

FedEx

hold conference calls to discuss quarterly results.

Ball
Corp.
and

Qualcomm

hold investor days.

The Bank of Japan announces its monetary-policy decision. The central bank is expected to maintain its ultralow interest-rate policy and keep its target rate unchanged at negative 0.1%, as it has been since early 2016. The dovish

BOJ
,
in contrast to the hawkish U.S. Federal Reserve, has sunk the yen to its lowest level against the U.S. dollar since 1998.

The Conference Board releases its Leading Economic Index for August. The consensus call is for a 0.1% month-over-month increase, after a 0.4% decline in July. The index has fallen for five consecutive months, indicating that the risk of a recession is rising in the near term.

Friday 9/23

S&P Global releases both its Manufacturing and Services Purchasing Managers’ indexes for September. Economists forecast a 51 reading for the Manufacturing

PMI

and a 45.3 for the Services PMI. This compares with 51.5 and 43.7, respectively, in August.