Gas Crisis Hits at Sensitive Time for Energy

Copyright © 2021 Energy Intelligence Group

The global gas market is in crisis, with no relief in sight. Europe and Asia are experiencing record prices, while prices in the gas-rich US are at seven-year highs. While several factors are at play, demand is simply outpacing supply. Considering the market should now be in its comfortable “shoulder” season for gas consumption, the situation could get much worse this winter. Soaring gas and LNG prices reflect extremely tight global markets. This time last year, European gas prices were below $4 per million Btu. But they have recently been closer to $25/MMBtu — the equivalent of oil priced at over $150 per barrel. The reasons behind the spike are varied. These include LNG plant outages; Russian gas giant Gazprom's unwillingness or inability to supply more gas than it is contractually obliged to deliver; lower Norwegian gas output; declining production in Europe; and a post-pandemic rebound in Asian LNG demand.

The growing globalization of gas markets means no region is spared. Asia-Pacific spot LNG prices are widely expected to cross the $30 per million Btu threshold this winter, which will make it hard for Europe to attract LNG cargoes. Winter weather will be key to how bad the crisis gets. European storage volumes are much lower than normal after a cold 2020-21 winter and Asian LNG demand remains strong heading into the upcoming winter. Tightness could perhaps ease if Gazprom's controversial Nord Stream 2 pipeline were to start up soon, but that looks unlikely. EU gas storage facilities have recently been around 74% full, versus more than 94% at the same time last year. Assuming normal seasonal temperatures, HSBC analysts suggest European storage volumes would exit winter in the low 20% range, which would be some 15 percentage points below the average for recent years. However, they warn that a repeat of last year's cold winter could push storage volumes to dangerously low levels, raising the risk of price spikes and/or shortages in some countries.

The US may be one of the world’s largest gas producers, but the market appears to be making a structural move higher, where benchmark Henry Hub prices trade in a $4-$6/MMBtu range instead of the $1.50-$3/MMBtu band that has marked the shale era over the last decade. If this winter is cold, some predict prices could jump above $10/MMBtu. Underpinning this tight market scenario is the meager production response by US gas producers, who are not only hemmed in by growing takeaway capacity restraints but also investor demands for cash returns over growth. Henry Hub gas surged to over $5.80/MMBtu this week, the highest level since 2014, making US industrial consumers nervous. The Industrial Energy Consumers of America (IECA) has asked the US Secretary of Energy to intervene directly to reduce LNG exports to keep more supply at home and protect gas-intensive domestic manufacturers. The US Energy Information Administration (EIA) is not panicking yet. It expects US gas production to average 92.7 billion cubic feet in the second half of 2021 — up from 91.7 Bcf/d in the first half — and sees a boost to 95.4 Bcf/d in 2022, driven by higher gas and crude prices, which should “remain at levels that will support enough drilling to sustain production growth.” EIA expects prices this winter to reach a monthly average peak of $4.25/MMBtu in January and decline through 2022, averaging $3.47/MMBtu for the year on the back of rising output and slowing growth in LNG exports.

The crisis has thrust energy transition policies into the spotlight and raised questions about underinvestment in oil and gas supplies, since demand is expected to keep growing this decade. Meanwhile, the world is gearing up for the Glasgow climate summit, where nations are expected to step up climate pledges. Poland blames EU climate policy for its high power prices. Spain and France warn there could be a popular revolt against transition policies if consumers associate them with higher energy costs. EU Climate Chief Frans Timmermans is unapologetic, insisting Europe would not be in this position if it were not still so dependent on fossil fuels. "So instead of being paralyzed or slowing things down because of the price hike ... we should speed things up in the transition to renewable energy," he said. In the US, the crisis comes as the Biden administration attempts to draft the most ambitious climate legislation in the country’s history, which will require support from all Democrats — including moderates from fossil fuel-producing states.

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