European natural gas prices plunge 21% in their steepest decline since March as latest rally 'overshot fundamentals'

• Dutch natural gas prices plunged as much as 21% on Monday as Europe builds up supplies for the winter.
• The price decline erased one week of price gains, highlighting just how far the commodity has run in recent months.
• Goldman Sachs said European natural gas prices overshot their fundamentals in recent weeks.

Dutch natural gas prices plunged as much as 21% on Monday as European countries continue to build up supplies in anticipation of the upcoming winter months.

September futures prices for Dutch natural gas saw their steepest drop since March, falling to as low as 268 euros per megawatt hour. Still, the sharp decline only brought prices down to levels seen last week, highlighting just how far the commodity has surged in recent weeks and months. Dutch natural gas prices are up more than 1,000% since last year.

Driving Monday's decline is a mix of supply and demand dynamics that include ongoing demand destruction as various industries adapt to the surging prices and a potential recession, and Germany indicating that its gas storage facilities are reaching capacity faster than expected.

German Economy Minister Robert Habeck said he expects gas prices to start cooling down now that Germany's gas storage facilities are 85% full, ahead of its October target. "As a result, the markets will calm and go down," Habeck said.

The sharp price moves in both directions can also be attributed to illiquidity, according to Goldman Sachs, who said in a Friday note that the recent price spikes don't align with the underlying fundamentals of the commodity.

"European gas prices have in our view overshot fundamentals fueled by a combination of supply and demand (heat wave, nuclear outages) concerns and exceptionally poor liquidity in the market, illustrated by erratic and sparse intra-day price moves," Goldman Sachs' analyst Samantha Dart said.

A resumption of gas flows from the Nord Stream 1 pipeline could add to further natural price declines, Goldman added, though there is no indication of when that may happen as the pipeline deals with reported maintenance issues.

Goldman ultimately expects Dutch natural gas prices to fall to a range of 170 to 190 euro per megawatt hour, which would represent a sharp decline of as much as 41% from current levels.

"The longer prices remain this high, the higher the impact on demand, further reinforcing our view that storage will enter winter at comfortable levels, setting the stage for sequentially lower prices through winter," Dart said.