Wednesday marked another chaotic swing for global energy markets as prices in Europe slid from astronomical highs to finish lower on the day and liquefied natural gas (LNG) spot prices in Asia were assessed at a record of nearly $60/MMBtu.
In Europe this week, wrangling has continued over how to best regulate the start-up of Nord Stream 2 (NS2), five nations called for an investigation into the natural gas market and European Energy Commissioner Kadri Simson said she would introduce reforms by the end of the year to stave off similar volatility in the future.
British and Dutch futures fell about $3 each day/day to settle near $37/MMBtu, but touched intraday highs of roughly $55 each. In Asia, Japan-Korea Marker prices for November were assessed at $56.326/MMBtu. Meanwhile, in the United States, gains were pared Wednesday as Henry Hub followed European benchmarks lower and forecasts for October have proved exceptionally mild.
For now, the market feels “panic driven,” said LNG broker Melissa Lindsay. “But the spike last year justifies the higher risk premium people could pay for cover this winter,” she said of previous records that were set last January, when LNG cargoes were in short supply during a historic cold snap.
Lindsay, who also owns the online LNG trading platform Emstream, told NGI that prices in Europe and Asia are so high that “we have clients unsure whether we are talking in cents or dollars when discussing discounts and premiums” for cargoes.
European storage inventories are at about 76% of capacity, well below the 10-year average, but at a level to sustain the continent throughout this winter, Simson told the European Union parliament in an address Wednesday.
Simson pushed for more renewable energy production as a long-term salve for the energy crunch. Her remarks stood in sharp contrast to emerging claims that countries throughout Europe and elsewhere are failing to invest adequately in fossil fuels as the energy transition unfolds. In the near-term, she said the bloc must do what it can to support citizens most impacted by the sharp spike in prices.
“This price shock cannot be underestimated,” Simson said in prepared remarks. “It is hurting our citizens and in particular the most vulnerable households, weakening competitiveness and adding to inflationary pressure. If left unchecked, it risks compromising Europe’s recovery as it takes hold.”
Europe and Asia have been locked in a fierce competition for LNG cargoes in a bid to restock ahead of the colder months. Coal, wind generation and hydropower have also been in short supply across Europe and elsewhere. German utility Steag GmbH temporarily shuttered a coal plant this week due to a lack of supplies, signaling that gas-to-coal switching has been difficult. Carbon prices have also jumped sharply in Europe as the continent has burned more energy-intensive fuels amid an economic rebound from Covid-19.
Will Natural Gas Prices Go Higher?
Fears of energy shortages this winter continue to pervade the market.
“If it ends up being a colder-than-normal winter, things will get even worse as demand from the residential sector will increase further,” said Rystad Energy’s Carlos Torres-Diaz, head of gas and power markets. “If this happens, probably European governments will have to restrict the use of natural gas from the industrial sector to ensure enough supplies to the residential sector.”
He told NGI that since the ceiling set by oil-indexed prices was left behind weeks ago, maximum LNG prices “will be set by the willingness of LNG buyers to pay.” LNG on the spot market is more than double the cost of crude-linked supplies at current prices, according to NGI data.
“We are currently living in exceptional circumstances because the world gas market has never been in a situation where Asia and Europe were obliged to compete fiercely for the marginal LNG cargo available,” said analysts at Engie EnergyScan in a note to clients on Wednesday.
The rally has proved a boon for U.S. LNG exporters, with netbacks from Asia and Europe to the Gulf Coast at nearly $40/MMBtu through the winter months, according to NGI data.
Linepack has started on NS2, considered a critical link to move more natural gas from Russia to Europe. But regulatory hurdles remain, including an EU requirement that ownership of transmission assets and natural gas supplies be separate. Gazprom PJSC has challenged the rule in an appeal that was allowed to move forward by the EU Court of Justice Wednesday. It could ultimately take months to certify that the system complies with the rule.
But the 5.3 Bcf/d NS2 also faces political resistance. Rather than pushing to jumpstart commercial operations on the system at a time when the continent is short gas, a group of European lawmakers in parliament this week pushed the bloc’s executive branch to make sure the pipeline fully complies with all applicable laws, citing concerns over energy security.
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