Don’t stop me now, I’m having a good time: Natural Gas markets march higher.

Currently TTF Nat Gas, JKM LNG, Henry Hub and LPG prices are at or near their highs – see below TTF price in Euro/MWh [courtesy of Trading Economics] and a global map of gas index prices in USD/MMbtu for comparison. 

The global gas pipeline and LNG spot cargo (JKM and term index contracts) reach their highs, in USD/MMbtu.

Why?

Of course, this is symptomatic of low inventories and recovering higher demand. A combination of soaring power prices, driving higher demand and prices in natural gas in both Europe and Asia, and naturally the LNG spot market is reacting to meet that elevated demand/price reaction, as it is effectively a waterborne spot arbitrage solution – travelling to the market that pays the most.

Firstly, the COVID impact in energy markets has been varied. General oil demand dropped in 2020 as the pandemic hit, for example, a reduction in the number of flights (as much as a 60%-80% drop at the peak) is still lagging, but recovering very strongly is gasoline demand. More people are choosing solitary modes of transportation by car, and avoiding mass-commuter trains. Moreover, power demand is now at record levels – in Europe and Asia, China is 10% or more than last year’s demand. Simply more people are working from home. Also, the general economic recovery is taking place in the industrial sectors for manufacturing and infrastructure – think ‘build back better’ and the ESG-movement, power and metals demand are now well above 2019 demand levels as a result. And consumer demand is back vigorously too, even during COVID, think about those empty flour shelves!

The supply side is also impacting prices positively, with disruption in Oz and Russia leading to low European stock levels just prior to peak winter seasonal demand. Power is produced from other energy sources: renewable solar/wind (which is very intermittent, especially in northern hemisphere winters), hydro (impacted by unseasonal low rainfall), coal, oil, natural gas and nuclear generation processes. But many of these non-renewable energy sources are on exceptionally low stocks due primarily to a lack of long-term investment – oil has been underinvested since 2008, China has been dialing back coal production capacity for years now, leading to substitute power production sources being constrained.

The investment cycle is naturally years not days/months as needed now to resolve the current imbalance issue. And this highlights the importance of solving the energy transition balance between supply and demand well, or the volatility experienced this year and last is here to stay until the transition is completed over the coming decades to 2050 and beyond. Oil well development cycles are typically 2-4 years from exploration to production, LNG terminal development is similar, if not longer. But the reality is these substitute energy sources are power price ‘peak’ solutions, not baseload solutions, with added cost of compliance carbon at 60 euro/mt – on its all-time highs as the ESG march (quite rightly) gathers pace and focus.  Global gas consumption is in the order of 4000 BCM,  and where this peaking substitution occurs, it is temporary, and limited to a small % of total demand.

Impact Winter 2021/22

Current natural gas stock levels in Europe are probably adequate to cope with an average/typical northern Hemisphere winter. However an unusually frigid winter may change this, and current stock levels are already at all-time lows, and so not adequate. Pricing dynamics then will be very tricky. Blackouts of the 1970s in the UK may return in places, and these are occurring elsewhere now, naturally, prices will continue much higher to ultimately destroy the marginal demand, something that happened here in the UK fertilizer market last month.

Russia has calmed prices this week by agreeing to supply more, pushing for a Nord Stream 2 approval, in response TTF prices are as much as 10% lower in the last couple of days.  A reminder that energy can be used as a leveraging tool in this short-inventory situation for political agendas.

Outlook

Seasonal northern hemisphere winters look set for uncertain and increased highly volatile pricing until a time when inventories return to normal levels and energy transition can better balance the market with stored renewables. The issues mentioned in this article are structural and long-term, thus the natural gas markets will likely see sustained pressure from these forces during peak demand periods for the near to medium-term future.  

Onyx Advisory is a global focused energy consultancy helping its customer hedge, trade and invest in energy better. Find the IEA resource for information on the natural gas macro trends in supply and demand:

IEA (2021), Natural Gas Information: Overview, IEA, Paris https://www.iea.org/reports/natural-gas-information-overview

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