Complex Made Simple

Natural gas supply and price crises are not easing- Here’s why

LNG gas

LNG prices averaged $2 per million British thermal units (mmBtu) in 2020. Last August’s spot prices touched $15/mmBtu. At their recent peak, they reached $56 mmBtu. There are reasons for that

Asian spot gas prices are currently trading at above $37 per mmBtu Qatar recently said it was powerless to cool energy prices Financial players and traders have been committing to extreme high hedging and speculative positions

LNG prices averaged $2 per million British thermal units (mmBtu) in 2020. Last August’s spot prices touched $15/mmBtu. At their recent peak, they reached $56 mmBtu.

US cargoes used to be expensive versus oil-linked supplies from Qatar and Australia for example, but with Qatar announcing it is unable to supply more natural gas, competition has sprung.

A deal at $2.50 + 115% of Henry Hub futures (the US standard adopted globally), would be roughly about $9-$10 mmBtu on a delivered basis into Northeast Asia.  

Jason Feer, global head of business intelligence with consultancy Poten & Partners said Chinese companies are heavily exposed to Brent-related pricing for LNG and the US purchases give some diversity to the pricing.

Asian spot gas prices are currently trading at above $37 per mmBtu after reaching a record high of over $56 earlier this month. 

What is at the root of the crisis?

Gas prices across Europe and elsewhere have surged because of a number of factors including increased demand, low inventories, and a lack of wind power generation.

Qatar, the world’s largest seller of liquefied natural gas (LNG), recently said it was powerless to cool energy prices.

“We are maxed out, as far as we have given all our customers their due quantities,” Qatar energy minister Saad al-Kaabi recently said. “I am (also) unhappy about gas prices being high.”

LNG gas

The rebound in economic activity after the easing of coronavirus lockdowns has laid bare a shortage of natural gas stocks and other fuel supplies, causing blackouts in some countries.

To keep factories open and homes heated, industry executives and governments are having to pay much more for energy and revert to coal and oil, the most polluting fossil fuels.

As some generators switched to burning oil, Brent ($84) and WTI ($82) crude benchmarks have both risen more than 65% this year.

If you live in continental Europe or the UK, the natural gas that heats your home this October is costing at least 5 times more than it did a year ago.   

The main culprit, according to media and politicians, is Russia, as it is refusing to increase its gas deliveries to the market. When looking at market fundamentals, it appears that Russia is partly responsible for the energy shortage.  

Early this October, just after Gazprom’s condensate processing facility in Siberia was destroyed, the crude oil hysteria jumped to natural gas. Crisis reports started to emerge in the market. Gazprom decided to put pressure on the physical gas market, expecting financial markets to move very soon after.

Another factor is that in recent months, financial players and traders have been committing to extreme high hedging and speculative positions in natural gas markets since the beginning of this year.

Goldman Sachs pitched a commodities “supercycle” in April 2021, JPMorgan followed a bit later. All other major financials followed suit very soon after, leading to a legal but pushy energy price spike expectation. These forecasts were made even at times when physical markets, oil especially, did not demonstrate crude oil shortages.

Algorithms are now in control of the financial markets, not physical supplies.