In mid-September, the TTF marker – otherwise known as the Title Transfer Facility virtual trading point in the Netherlands – that represents the price of LNG in Europe flipped into trading at a premium to its Asian equivalent, the Japan Korea Marker (JKM). In fact, the TTF spot price hit its highest level since 2008 in June, and then has proceeded to shatter historic highs since, more than tripling in price to US$24/mmBtu from its starting point this year of US$7.50/mmBtu in January. Onshore European gas isn’t in isolation on this trend as well. In August, the UK NBP (National Balancing Point) also hit its highest-level ever and has since recorded new highs every week, as have other European gas contracts.
And it is not as if Asian LNG spot prices haven’t been rising either. After a major spike to over US$33/mmBtu in mid-January due to winter demand in China, the JKM fell back to a more usual level of US$6-8/mmBtu after, trading at its typical premium to TTF. But in May, JKM breached the US$10/mmBtu mark, with TTF following a month later. By September, JKM is also shadowing TTF at around US$25/mmBtu, which is nearly 4 times higher than typical September levels. In the US, which is now a major LNG exporter, Henry Hub pipeline natural gas prices are also at their highest levels since 2014. With all these record rallies in natural gas markers, what is going on in the world of LNG?
In short, resurgent demand and curtailed supply, which is beginning to look like a perfect storm that could see LNG prices explode if the coming winter proves to be particularly severe.
We start with Europe, where the potential problems seems most severe. Colder-than-usual weather in March and April, even spilling in May, meant that natural gas was in high use for heating. This delayed the start of the injection season, where piped natural gas or LNG is injected into storage infrastructure for stockpiling, to mid-May, instead of the usual time-frame of end-March. This meant that Europe’s natural gas inventories are now at their lowest levels in five years, due to intensive drawing earlier in the year and spillover reluctance over Covid-19 uncertainty from the previous year. And when the injection season did start, it was difficult to obtain cargoes. With JKM spot contracts trading above TTF, it was more profitable to send available LNG cargoes to China or Japan, where demand was rising for summer cooling requirements.
In fact, the price dynamics were so lopsided at one point that, LNG was extracted from tanks in Spain and sent to East Asia in six cargoes to meet demand there. Several planned and unplanned outages over summer also hampered the ability to amass sufficient inventories of natural gas. Maintenance on the Yamal-Europe and Nord Stream pipelines saw piped Russian gas volumes fall, with flows falling even more in August due to a fire at one of Gazprom’s condensate plants in West Siberia and outages at Norway’s giant Troll field.
All this means that Europe is now poised to enter winter with depleted levels of natural gas, which has caused prices to skyrocket to attract potential volumes. With TTF now at a premium to JKM, we could see more spot LNG cargoes make their way to Europe. But available spot cargoes are far and few in between this year. Most of the world’s LNG trade is locked up in long-term contracts linked to crude prices, and with crude currently cheaper than gas, that leaves less available for spot. There is also less supply in general, with liquefaction plants from Trinidad & Tobago to Nigeria to Egypt all underperforming this year. Planned efforts to bring in additional gas supplies into Europe through more immediate means, with all eyes on the upcoming start-up of the Nord Stream 2 pipeline in October and Norway clearing Equinor to increase gas production/exports from the Oseberg and Troll fields, could help cool down prices, but it still seems that European prices are set to remain very elevated over the winter. And that is already having dire consequences. Two of the world’s largest fertiliser manufacturers have cut production in Europe due to high gas prices, which in turn is causing a shortage of carbon dioxide that is impacting industries such as meat processors (CO2 is used to vacuum pack fresh produce) to makers of carbonated soft drinks. The high cost of gas is being passed on to consumers, and that is also affecting vital industrial processes like steelmaking and cement manufacturing.
How long the developing gas crisis in Europe will last will depend on what is happening elsewhere. In the US, where winter storms in Texas, the recent Hurricane Ida and the upcoming Tropical Depression Nicholas decimated production, natural gas prices are already double what they were in January, causing electricity prices to rise as well. There are already calls to limit LNG exports to keep domestic energy prices down, with the Industrial Energy Consumers of America trade group calling of the US Department of Energy to halt of LNG exports.
And then there is China. Having emerged early from the Covid-19 pandemic, Chinese power generation demand exceeded pre-Covid levels this summer. And with China making a concrete show to tackle its emissions, that means that it has been more reliant on gas than coal for power generation. Experience from harsh winters in the past decades will also mean China will want to be fully prepared this year. And just like in Europe, the high price environment for gas is already biting into some key industries, with reports suggesting that several dozen major steel, ceramic, glass, aluminium, fertiliser and chemicals manufacturers are reducing production to avoid the worst effects of a high gas prices. A similar situation is also playing out in Japan and South Korea, to a lesser extent. But the one advantage that East Asian markets do have over their European counterparts, which are firmly wedded to natural gas, is that they have greater flexibility in power generation sources. Coal is an immediate and obvious, if more polluting, option. But there have also been reports that other Asian countries like Pakistan and Bangladesh that are not as entrenched in natural gas have started switching to fuel oil, since the run-up in crude prices in 2021 is nowhere near what has happened in natural gas.
It is crunch time for gas, particularly in Europe. Record high prices are still not enough to fill the natural gas void. Desperate moves are already being made to stave off the worst potential effects of this, with a lot of hope being pinned on Nord Stream 2. But it might not be enough. Winter is coming. And if it is harsh and cold one, then the situation could turn apocalyptic. This year, the European energy industry will not be wishing for a white Christmas, but a mild and balmy winter.
*"Winter Is Coming" is the motto of House Stark, one of the Great Houses of Westeros. The meaning behind these words is one of warning and constant vigilance, from the HBO television series Game of Thrones
End of Article
- Crude price trading range: Brent – US$75-78/b, WTI – US$72-75/b
- Even with the easing of OPEC+’s supply quotas, global crude markets continue to appear tight, especially with recovering demand, leading crude benchmarks to inch closer to the US$80/b level
- A slide in US crude inventories following extreme weather and ahead of winter demand also bolstered concerns over supply/demand fundamentals, with most analysts agreeing that crude tightness will continue into 2022
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In our International Energy Outlook 2021 (IEO2021) Reference case, we project that, absent significant changes in policy or technology, global energy consumption will increase nearly 50% over the next 30 years. Although petroleum and other liquid fuels will remain the world’s largest energy source in 2050, renewable energy sources, which include solar and wind, will grow to nearly the same level.
Source: U.S. Energy Information Administration, International Energy Outlook 2021
Falling technology costs and government policies that provide incentives for renewables will lead to the growth of renewable electricity generation to meet growing electricity demand. As a result, renewables will be the fastest-growing energy source for both OECD and non-OECD countries. We project that coal and nuclear use will decrease in OECD countries, although the decrease will be more than offset by increased coal and nuclear use in non-OECD countries.
We project that global use of petroleum and other liquids will return to pre-pandemic (2019) levels by 2023, driven entirely by growth in non-OECD energy consumption. We do not project OECD liquid fuel use to return to pre-pandemic levels at any point in the next 30 years, in part because of increased fuel efficiency.
Source: U.S. Energy Information Administration, International Energy Outlook 2021 Reference case
Note: Delivered consumption includes fuels directly used by the end-use sectors as well as electricity, excluding generation, transmission, and distribution losses.
We project that the industrial sector will increasingly consume petroleum liquids as feedstock in the expanding chemicals industry. In OECD countries, liquid fuel consumption in the industrial sector will grow three times as fast as liquid fuel consumption in the transportation sector.
Delivered electricity consumption will grow the most in the residential end-use sector. We project that in non-OECD countries, electricity will account for more than half of the energy used in households by 2050, compared with 33% in 2020. In non-OECD commercial buildings, we project that electricity will make up an even larger share of energy consumption in 2050, at 64%.
Globally, we project increased consumption of natural gas through 2050. The industrial sector is the main contributor to the growth in global natural gas consumption through 2050 in our Reference case, largely in non-OECD countries. Across OECD countries, gains in energy efficiency will reduce household natural gas use by 2050. The industrial sector will use the largest share of both natural gas and coal among all end-use sectors. Industrial coal use will expand fastest in non-OECD countries, where energy-intensive industries such as iron and steel production are expanding more quickly than in OECD countries.