Europe’s benchmark natural gas prices at the Dutch TTF hub hit their highest level in nearly four months earlier this week. Prices have soared 700% since the start of 2021. And we probably haven’t seen the biggest rally yet, analysts say.
Europe’s natural gas prices have been trending lower in recent weeks Natural gas prices began to soar amid the energy crisis in the fall of last year. The crisis then reached a whole new level after Russia’s invasion of Ukraine in late February, which prompted the EU to scramble to replace as much Russian gas as possible while Russia cut deliveries to major customers – including of Germany and Italy – in the middle of June. In the three weeks since Russia cut supply to Europe and an outage at the US LNG facility in Freeport halted exports, European gas prices have risen 60%. Front-month TTF futures rose 8% to $179 (175 euros) per megawatt-hour (MWh) on Tuesday, hitting their highest level since March. The price is five times higher than now in 2021. That’s also more than 11 times above the long-term average, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank. The European gas price jumped to the equivalent of $300 per barrel of crude oil, Hansen noted. Meanwhile, other commodities, including oil, have retreated since mid-June as the Fed and other central banks raised key interest rates by the most in decades to combat the highest inflation in more than 40 years, exacerbated by the increase in energy and fuel prices. Aggressive interest rate hikes fueled fears in stock and commodity markets that a recession is on the way. Significantly lower natural gas deliveries from Russia to Europe, the upcoming two-week routine maintenance on the Nord Stream pipeline starting on July 11 and fears that Russia may not restore supplies once the maintenance is complete are also key factors in the fears for recession. in the German and Eurozone economies, and in all EU economies, in the very near future. “This is the 1970s for natural gas” Ever-changing energy markets since the Russian invasion of Ukraine have highlighted the fact that natural gas has become a truly global commodity in recent years, with strong LNG demand in Europe driving up prices in the region and Asia. The ability of U.S. exports to at least partially offset lost Russian supply also pushed the price of the U.S. benchmark natural gas index at Henry Hub to double over the past year. U.S. natural gas prices have fallen about 40% since the Freeport LNG shutdown as more gas will be available for U.S. consumption. “This is the 1970s for natural gas,” Kevin Book, chief executive of US research firm ClearView Energy Partners, told Bloomberg earlier this week. “The world is now thinking of natural gas as it once thought of oil, and the essential role that natural gas plays in modern economies and the need for a secure and diverse supply have become very visible,” added Book.
The need for diversification and the importance of natural gas as a global rather than regional commodity has never been greater as Europe aims to break free from its Russian gas bind and never again depend on Moscow for its energy supply. The EU is a long way from achieving that goal now, as Russian gas cuts have shown—Germany, Europe’s largest economy, has warned of a “Lehman Brothers” moment if gas is cut off now.
Not that Europe isn’t trying – projects for LNG import terminals have been activated from Greece to Germany and Finland – but it will take some time to free Europe from dependence on Russian gas. The EU aims for this to happen by 2027. LNG investment is back Leaders of the G7 group of the world’s leading industrialized nations also highlighted the importance of LNG at their summit in Germany at the end of June. While reiterating support for the Paris Agreement’s climate goals to limit global warming, G7 leaders acknowledged that “investment in this area is essential in response to the current crisis.” “In these exceptional circumstances, publicly supported investments in the natural gas sector may be appropriate as a temporary response,” they added. Meanwhile, LNG buyers are returning to long-term contracts to secure long-term supply of non-Russian gas and insulate themselves from increasingly volatile spot prices. “Many traditional LNG buyers will neither procure natural gas or LNG nor renew or sign additional LNG contracts with Russian sellers. Spot prices have also been high and volatile, pushing many buyers into longer contracts,” Wood Mackenzie principal analyst Daniel Toleman said in May. According to Massimo Di-Odoardo, Vice President of Natural Gas and LNG Research at Wood Mackenzie: “A huge increase in investment in LNG projects is underpinned by rapid growth in European LNG demand, with US developers already looking to fill the space.” Qatar is also significantly expanding its LNG export capacity in the world’s largest LNG project, which was announced a year before the Russian invasion of Ukraine. In recent weeks, state-owned QatarEnergy has selected international majors ExxonMobil, ConocoPhillips, Eni, TotalEnergies and Shell as partners in the North Field East expansion project.
Until new US and Qatari capacity comes online in the middle of this decade, the natural gas market will be tight as energy trade flows change forever. The recent rally in Europe’s natural gas prices since Russia cut supply may not be over as the EU scrambles for alternative supplies to avoid a winter of rationing and recession. By Tsvetana Paraskova for Oilprice.com More top reads from Oilprice.com: