While crude oil and other commodity prices fell this past week amid growing recession fears and less liquid markets over the summer, one commodity is bucking the trend and continuing to rise — European natural gas.
Benchmark gas prices in Europe at the Dutch TTF hub hit their highest level in nearly four months earlier this week. Prices have jumped a staggering 700% since the start of 2021. And we may not have seen the biggest rise yet, analysts say.
Gas prices in Europe have bucked the trend in recent weeks
Gas prices began to rise amid the energy crisis last fall. The crisis then reached a whole new level after Russia’s invasion of Ukraine at the end of February, leaving the EU scrambling to replace as much Russian gas supplies as possible, while Russia cut supplies to major customers – including Germany and Italy – in mid-June . In the three weeks since Russia cut supplies to Europe and an outage at the US Freeport liquefied natural gas facility halted exports, European gas prices have jumped 60%.
The front-month TTF futures contract jumped 8% to $179 (175 euros) per megawatt hour (MWh) on Tuesday, hitting its highest level since March. The price is five times higher than it was at this time in 2021. It’s also more than 11 times 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 a barrel of crude oil, Hansen noted.
Meanwhile, other commodities, including oil, have fallen 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, inflation that was exacerbated by the surge in energy and fuel prices. Aggressive interest rate hikes have fueled fears in capital and commodity markets that a recession is looming.
Significantly lower gas supplies from Russia to Europe, the upcoming two-week regular maintenance of the Nord Stream pipeline starting on July 11, and concerns that Russia may not restore supplies once the maintenance ends are also critical factors for fears of a recession in the German and Eurozone economies and all EU economies in the very near future.
‘It’s the 1970s for natural gas’
Forever-changing energy markets since Russia’s invasion of Ukraine have highlighted the fact that gas has become a truly global commodity in recent years, with strong demand for LNG in Europe pushing up prices in the region and in 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 at Henry Hub to double over the past year. U.S. natural gas prices have fallen about 40% since Freeport’s LNG outage, as more gas will be available for U.S. consumption.
“This is the 1970s for natural gas,” Kevin Book, managing director at US research firm ClearView Energy Partners, told Bloomberg earlier this week.
“The world now thinks about gas the way it once thought about oil, and the essential role that 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 gas as a global rather than a regional commodity has never been greater as Europe seeks to break free from Russia’s gas stranglehold and never again depend on Moscow for its energy supplies. The EU is a long way from achieving that goal now, as Russian gas cuts have shown – Germany, Europe’s biggest economy, has warned Lehman Brothers for a moment if the gas stops now.
Not that Europe isn’t trying – LNG import terminal projects have been activated from Greece to Germany and Finland – but it will take some time for Europe to wean itself off dependence on Russian gas. The EU aims for this to happen by 2027.
Investment in LNG is making a comeback
The leaders of the G7 group of the world’s leading industrial nations also emphasized the importance of LNG during their summit in Germany at the end of June. While reaffirming their support for the climate goals of the Paris Agreement to limit global warming, the G7 leaders acknowledged that “investment in this sector is necessary in response to the current crisis”.
“In these exceptional circumstances, publicly supported investment in the gas sector may be appropriate as a temporary response,” they added.
Meanwhile, LNG buyers are returning to long-term contracts to secure long-term supplies of non-Russian gas and insulate themselves from wildly volatile spot prices.
“Many traditional LNG buyers will not purchase spot gas or LNG, nor will they 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 Gas and LNG Research at Wood Mackenzie: “A huge increase in investment in LNG projects is underpinned by rapid growth in demand for LNG in Europe, 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 firm QatarEnergy has selected international majors ExxonMobil, ConocoPhillips, Eni, TotalEnergies and Shell as partners in the North Field East expansion project.
Until new U.S. and Qatari capacity comes online in the middle of this decade, the gas market will be tight as energy trade flows change forever. The recent rise in gas prices in Europe after Russia cut supplies may not be over as the EU scrambles for alternative supplies to avoid a winter of cuts and recession.
By Tsvetana Paraskova for Oilprice.com
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