Gas market: off to unchartered waters
Energodigest | 7 October 2022
The leaks discovered last week in two natural gas pipelines in the Baltic Sea have not only prompted major concern among climate activists (methane is 30 times more damaging to the environment than carbon dioxide), but have also brought renewed limelight on the ailing gas market. The damage to the export pipelines from Russia did not have much impact on gas pricing in Asia Pacific, while in Europe prices have returned to $40 per million BTU at the end of this week after jumping briefly to nearly $60 for front-month contracts (see Fig. 1).This is because neither pipeline was actively transporting gas at the time of the incidents. However, this backup supply channel, which was kept in hope of resuming the flow in the mid term, has been damaged, and it’s not clear how long it will take to restore it, which is especially alarming in the run-up to winter.
Gas storage facilities across the EU are filling up more quickly than planned (90% of capacity in early October[1] versus the 80% target set for 1 November). This offers a glimmer of hope that the region’s gas market will balance itself out, but it’s yet to be seen what the withdrawal rate will be during the winter months. LNG imports, though rising 92% y-o-y last month, are trending down, having declined from 15.3 bcm to 13.1 bcm between May and September (see Fig. 2).
While gas deliveries from the US to Europe[2] were up 60% y-o-y last month (thanks to, among other factors, a healthy price premium over Asia), the Americans cut back their supplies from 6.2 bcm in May to 4.1 bcm in September. As a result, the US share of the region’s imports declined from 52% to 31% between May and September (see Fig. 3), while Europe’s share of US LNG exports shrank from 77% to 48% in the same period (see Fig. 4).
Natural gas prices in Europe are now worryingly close to those in Asia, with Europe-destined LNG cargoes likely to be diverted to Asia. This may lead to a supply shortage, which could trigger a price spike, resulting in some of the lost supplies being shifted from Asia back to Europe.
On the other hand, China could increase its LNG purchases if the government decides to shake off the COVID-19 shackles. In this case, Europe could face a long-standing shortfall of gas, with the market equilibrium to be restored owing to weaker demand rather than stronger supply. According to the IEA, Europe’s gas consumption declined by more than 10% in the first eight months of this year compared with the same period in 2021.[3]
Growing global competition for supplies could herald tectonic shifts on the gas market. Suppliers are now snapping up all available vessels. According to Bloomberg, Shell has booked the LNG carrier Yiannis for as much as $400,000 per day, likely the most expensive ever for the Atlantic basin, while the Indian firm GAIL also secured the LNG Schneeweisschen vessel for about $360,000 per day.[4] If this is already happening in the Atlantic, what should we expect next?
On the other hand, China could increase its LNG purchases if the government decides to shake off the COVID-19 shackles. In this case, Europe could face a long-standing shortfall of gas, with the market equilibrium to be restored owing to weaker demand rather than stronger supply. According to the IEA, Europe’s gas consumption declined by more than 10% in the first eight months of this year compared with the same period in 2021.[3]
Growing global competition for supplies could herald tectonic shifts on the gas market. Suppliers are now snapping up all available vessels. According to Bloomberg, Shell has booked the LNG carrier Yiannis for as much as $400,000 per day, likely the most expensive ever for the Atlantic basin, while the Indian firm GAIL also secured the LNG Schneeweisschen vessel for about $360,000 per day.[4] If this is already happening in the Atlantic, what should we expect next?