Global natural gas markets are tightening this heating season, leading to higher costs of LNG supply to Europe in what could be a colder winter than the two previous mild winters.
Europe has stepped up imports of liquefied natural gas in recent weeks, especially LNG from the United States, where the benchmark gas prices at Henry Hub are significantly lower compared to the European benchmark, the Dutch TTF Natural Gas Futures.
With peak demand season in the northern hemisphere approaching, Europe is competing with Asia for LNG supply, which is driving prices higher and already discouraging some price-sensitive buyers in south Asia from buying LNG cargoes on the spot market.
But Europe doesn’t have much choice. It has to step up purchases to meet its rising natural gas demand as colder temperatures settle in while geopolitics adds another layer of uncertainty about near-term supply.
The European natural gas market has been on edge for weeks with the start of the winter heating season, a massive lull in wind speeds in northwestern Europe, a dispute over deliveries between Austria’s OMV and Russia’s Gazprom, and the end of the gas transit deal via Ukraine which expires on December 31, 2024. Ukraine has said it would not pursue talks about renewing the agreement with Russia.
As a result of the combination of all these factors, the front-month Dutch TTF Natural Gas Futures, the benchmark for Europe’s gas trading, have rallied in the past three weeks to hit a two-year high at the end of last week.
In the two months since September, Europe’s benchmark gas prices have jumped by about 40%, with the November 22 price topping $51.35 (49 euros) per megawatt-hour (MWh). That equals $14.97 per million British thermal units (MMBtu), nearly five times higher than the U.S. benchmark.
The widening premium of European prices to U.S. benchmark prices has incentivized more U.S. exporters to direct their destination-flexible cargoes to Europe. The huge premium of European prices against U.S. prices is set to further incentivize LNG exporters to ship more cargoes to Europe this winter season.
The higher European prices are also diverting LNG cargoes initially bound for Asia, as Europe currently commands a price premium.
In the past weeks, at least 11 cargoes have been diverted from either Asia or Egypt to Europe, Argus reported last week, citing vessel-tracking data from Vortexa.
But spot LNG prices to north Asia are also rising amid heightened competition from Europe. Last week, the Asian price hit the highest so far this year, at $15.30 per MMBtu.
Some Asian buyers, most notably India, have reduced imports due to the rising prices.
But Europe doesn’t have a choice—it needs LNG, and more of it, this winter, amid uncertainties about what’s left of the Russian pipeline gas supply after January 1, and weather forecasts pointing to a proper winter compared to two milder winters at the peak of the energy crisis in 2022 and 2023.
Therefore, Europe is boosting LNG imports—and paying more for them.
In November, Europe is on track to import 9.16 million metric tons of LNG, the highest volume since February, and much higher than in September and October, according to data from commodity analysts Kpler cited by Reuters columnist Clyde Russell. A large part of these would be imports of U.S. LNG, estimated at 4.32 million tons by Kpler.
Asia, for its part, is poised to import a lower overall volume of LNG and of U.S. LNG in particular, as the price-sensitive buyers in south Asia are retreating from the spot market amid higher prices, while China has comfortable inventories.
Tighter Market Balances
This winter, global natural gas supply balances could tighten, leading to elevated natural gas prices and potential price spikes, the U.S. Energy Information Administration (EIA) said on Monday.
One or more regions in the northern hemisphere may experience colder winter temperatures this year, as weather models point to a possible shift from El Niño to La Niña, which is generally associated with colder, drier weather in much of the Northern Hemisphere during the winter. The European Centre for Medium-Range Weather Forecasts predicts a colder winter in Northwest and Central Europe, the EIA noted. The last two winters were exceptionally warm, contributing to relatively low natural gas consumption in Europe, higher end-of-season storage inventories, and lower natural gas prices.
As of the end of November, weather forecasts point to this winter in Europe being colder than the previous two mild winters. Colder temperatures and the looming end to the gas transit deal via Ukraine would tighten the market and force Europe to pay up for LNG supply.
While there haven’t been any alarming warnings of a natural gas shortage for the 2024/2025 winter, Europe’s energy security will come at a higher cost.
Source: By Tsvetana Paraskova from Oilprice.com