There is a global market for natural gas, but when supplies are as tight as they are today, technical problems can be painful local events.
Prices for the heating- and power-generation fuel have generally been moving in the same upward direction everywhere this year as storage levels remain depleted and as Europe’s geopolitical tension with Russia, a crucial natural-gas exporter, escalates in the wake of Russia’s invasion of Ukraine.
But on Tuesday, they went in dramatically opposite directions. The U.S. futures benchmark, the Henry Hub, plunged more than 15% to $7.28 per million British thermal units, while the Dutch TTF benchmark surged 16% to nearly $30 per MMBtu.
Two things came together on Tuesday: Freeport LNG, which liquefies and exports natural gas from Quintana Island, Texas, said its facility won’t resume full operations until late 2022 after a fire that broke out last week. Even partial operations won’t start for at least three months, which surprised observers since the company previously telegraphed that the facility would remain shut down for at least three weeks. That takes out about 18% of total U.S. liquefied natural gas export capacity. Lower exports mean more natural gas gets to stay at home, possibly allowing more to be stored up for the winter.
It also means less gas for Europe, though. Exacerbating that issue, Russia’s Gazprom said Tuesday that Nord Stream, the pipeline that transports Russian natural gas to Germany, is running at reduced capacity. Gazprom blamed Germany’s Siemens for failing to return gas compressor units in time after repairs. Whatever the reason, the pipeline is only able to supply 100 million cubic meters of gas per day, or 3.53 billion cubic feet—around 60% of total planned supply.
The price reaction might look overdone given that the outage at Freeport LNG is a drop in the ocean, compared with the amount of natural gas the U.S. produces every day—about 2%. One way to interpret the wild swing is that the existing price rally was probably more about geopolitical skittishness than about fundamentals.
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The 2% figure also understates its importance at the margin. Freeport LNG has capacity to liquefy and export 2.1 billion cubic feet per day, which is about 15% of the volume that the U.S. added to its natural-gas storage the week before the fire broke out. Using a back-of-the-envelope calculation, if the U.S. added natural gas to storage at the same rate it did in 2021, then it was on track to end up a hair below the five-year range ahead of winter heating season, when shortages can cause price jumps. Adding 2.1 bcf/d of additional natural gas over the next 90 days would take it comfortably within that five-year range.
The latest development is salt in the wound for Europe, where soaring energy prices are leading some factories to shut down. Meanwhile, given the relief U.S. factories could see after the drop in natural-gas prices following Freeport LNG’s outage, the incident could be fodder for U.S. industrials to lobby for reduced LNG exports, as they did last year.
The Industrial Energy Consumers of America, an industry group of manufacturers, released a statement on Tuesday saying that the drop in natural-gas prices following the Freeport LNG development “demonstrates the clear connection between LNG exports and the inflationary impacts to domestic prices for natural gas and electricity.”
There could be geopolitical consequences, too. The U.S. and Europe have kept up a united front on energy policy so far, with the U.S. touting its ability to send LNG cargoes to Europe. The sudden price relief for one party and financial strain for the other increases the risk that policy, not just prices, end up diverging, too.
Related Video As Europe races to wean itself off Russian energy, American natural-gas producers are struggling to meet the demand and prices are rising. Factors including extreme weather and equipment needs have created a bottleneck amid the war in Ukraine. Illustration: Laura Kammermann and Sharon Shi
Write to Jinjoo Lee at [email protected]
Crossy_Grynch on June 15th, 2022 at 17:25 UTC »
This autumn is going to interesting, full of drama and behind-the-stage agreements.
I hope there will be enough popcorn.
MoltenGoldfish on June 15th, 2022 at 13:22 UTC »
This has always been the trump card in Putin's pocket. It is one thing showing a hesitant united front against Russian aggression when this all began and an entirely different thing maintaining it.
Energy markets that have developed over the course of decades cannot be switched off at the drop of a hat, and the strategic vulnerability of the EU in forgoing any real sense of energy security has really been put under the spotlight. .
Inflation is continuing to climb, European bond spreads are widening significantly and member states are going to start to question what they value more - heating their domestic population or punishing Russian aggression.
This is why we have seen the likes of Macron encouraging Ukraine to sue for peace, it never had anything to do with allowing Putin to save face, it was about getting back to business as normal.
Russia are seemingly in this for the long haul, I'm not entirely sure the EU necessarily is.
theoryofdoom on June 15th, 2022 at 12:10 UTC »
Submission Statement:
This WSJ article considers the geopolitical significance of natural gas supply and futures pricing volatility to the probability of continuing coordination in opposition to Vladimir Putin's invasion of Ukraine. Russia is the largest natural gas supplier to Europe, by far. In Europe, natural gas futures are high and continue to increase. Supply is depleted (including due to Putin's invasion of Ukraine), demand remains high and futures prices have soared as a result. In the United States, the opposite is happening in natural gas futures markets. Stateside benchmarks saw an apx. fifteen percent drop in LNG futures prices at the same time Europe's rose by around the same amount. The article proposes that while the United States and Europe have coordinated their strategic alliance on energy markets so far, whether that continues is unclear, particularly where American exports are uncertain to offset supply shortages.