Global gas surge continues, with no quick fix

Alex Froley

21-Sep-2021

LONDON (ICIS)–Global gas prices continue to soar higher on the back of strong demand from buyers such as China, combined with low storage levels in Europe and various production issues around the world.

There has been quite a lot of talk about the impact of gas price “spikes,” but that word may underplay the situation. A spike suggests a relatively short-lived increase, followed by a sharp decline. There was, for example, a spike in east Asian gas prices in January amid a period of unusually cold weather. The ICIS East Asia Index shot up to $30/MMBtu, before falling back below $10/MMBtu soon after.

The increase in gas prices this summer hasn’t been a spike, but a long-running surge, with an uptrend in the EAX and the ICIS TTF benchmark for Europe from $5/MMBtu in March to $20-25/MMBtu in mid-September. There hasn’t been a brief burst of demand boosting the market for a week or two, but a growing concern over the tight market and the slow speed of injections into storage. And that means there may not be any sudden drop in prices either: there is no quick fix to the situation on the horizon.

DEMAND DESTRUCTION BEGINS

For many years, spot gas prices remained below crude oil prices, with the EAX rarely crossing parity with the Brent crude price. When gas became as expensive as oil, some users could switch to burning oil instead, providing an alternative supply. But that traditional ceiling was broken months ago in this year’s bullish gas market, with Brent crude now at around $13/MMBtu, only half the price of spot gas in Asia. This is due to the strength of demand for cleaner-burning gas, and constraints on fuel-switching.

Prices may be starting to reach something of a ceiling, however, with signs of demand destruction beginning as industrial users drop out of the market, voluntarily closing plants due to soaring costs. In the UK, major fertiliser plants owned by CF Industries have shut, also causing a knock-on impact on the provision of carbon dioxide to the country’s food processing sector. Norway’s Yara has cut ammonia production, as has Ukraine’s OPZ. Other major industrial users, such as steel makers, could cut back too.

Industrial shutdowns will reduce demand, helping limit further upside to prices. Switching from gas to coal in the European power mix also cuts gas demand, but this can then be counter-balanced by increased emissions prices that prompt switching back to gas. Windier weather could help cut gas demand for power production in the future by boosting renewables output.

China’s demand continues to grow, but as prices continue to soar, the rate of growth has slowed down. Data from ICIS ship-tracking and intelligence platform LNG Edge suggests imports in August reached only around 8% higher than the same month last year, compared with annual growth rates of up to 39% earlier in the year.

STORAGE GAP REMAINS

The problem of Europe’s storage gap has not gone away, however. European onshore storage holds around 66 billion cubic metres (bcm) of gas currently, some 26bcm less than at the same time in both of the two previous years, or the equivalent of almost 19 million tonnes of LNG.

There have been some major disruptions to global LNG production this summer. Closest to Europe, the 4.3 million tonnes per annum (mtpa) Norwegian Hammerfest plant remains out of action after a fire last September. It is not expected back until 2022, although Norway’s Equinor did announce this week that it was raising the production caps on its pipeline gas exports from October onwards to deliver some additional gas to Europe this winter.

Russia’s 11mtpa Sakhalin LNG plant has been carrying out maintenance in July and August, deferred from last year due to the coronavirus pandemic. Peru’s 4.5mtpa Pampa Melchorita plant has been out since early July and may only be restarting loadings now.

There has been maintenance in Australia too, including at the 9mtpa Ichthys plant in May and June.

The hurricane season has begun in the US, already causing some disruption to local feedgas production and power supplies, and prompting an uptick in US gas prices, though not to anywhere near as high as Europe and Asia.

The hurricane season remains a source of concern over coming months, with the potential for further disruption to US exports if shipping channels are blocked, as has happened in some previous years. Market-watchers, meanwhile, see only an unusually mild and windy winter across the northern hemisphere as offering the possibility of a major downturn in prices in the near term.

There is some new production due to enter the market at the end of the year, from the US Sabine Pass train six project and from the country’s new Calcasieu Pass project. But while there may be some initial cargoes loaded by the end of this year, the new trains are not expected to be fully up and running until later in 2022.

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