The electricity tariffs have soared 40% in Germany and France over the past two weeks. In countries like the UK and Spain, governments rush to take emergency measures to protect consumers. As a result, from aluminum smelters in Mexico to fertilizer plants in England, plants are temporarily shutting down. The markets are furious. Some argue that this is similar to the global commodity financial crisis. Even in America, which is considered the largest producer of natural gas, lobbying groups are calling on the White House to restrict the export of liquefied natural gas (LNG), which has risen in price to $ 25 per million British thermal units (BTU). In general, it has increased by 2/3 over the past month.
In a sense, the crisis emerged from a tangle of causes – from geopolitics to cautious accumulation in Asia, which led to higher prices. However, when viewed from a different point of view, everything turns out to be extremely clear: an energy market with very weak security buffers overreacts to disruptions. In turn, lower investment in fossil fuels could mean that higher volatility will continue.
The weather has played a cruel joke.
The scarcity has caught almost everyone by surprise. The international market had abundant gas in 2019, thanks to new LNG plants in America. When the Covid-19 pandemic broke and lockdowns limited demand, most of the excess gas went to storage facilities in Europe. It came in handy last winter, which was particularly cold in North Asia and Europe. Frost has increased the demand for heating. As a result, gas prices in Asia have quadrupled in three months. Buyers such as national gas companies have been watching the LNG market replenish their reserves. As a result, many goods destined for Europe have been diverted to Asia. On the other hand, the continent reduced its reserves, so prices there only rose a little.
The weather is unpredictable again this year. The hot summer has led to a rapid increase in gas demand in Asia. According to financial firm AllianceBernstein, the region accounts for nearly 3/4 of the world’s LNG imports. China has taken the lead with its rapid economic recovery. In the first half of 2021, the country’s electricity generation jumped 16% over last year. 3/5 of the electricity there is generated by coal; one-fifth is accounted for by hydropower.
However, due to the drought, hydropower production is low, and the demand for coal has decreased due to environmentally friendly policies. For example, it was proposed to replace coal-fired boilers with gas ones. There is also little investment in mining, which means China is increasingly dependent on natural gas. During 2021-H1, its production grew faster than coal and hydropower. Over the year, imports of Chinese LNG grew by 26%.
Other countries also have higher demand, due in part to the warm Asian summer. In addition, Japan, South Korea, and Taiwan are replenishing their warehouses. Meanwhile, a drought in Latin America, which receives half of its capacity from hydroelectric power plants, has affected gas demand. As a result, over the year, the demand for LNG in the region has almost doubled.
The supply of LNG did not meet the growing demand. A long list of minor disruptions affected global production. Some of the outages were caused by delayed repairs during the pandemic.
Asia does not want to share gas with Europe.
All LNG goes to Asia, so European buyers hardly get it. Now gas imports to Europe are 20% lower than last year. The stocks are 25% less than the long-term average. Gas production declined in Britain and the Netherlands. Analysts had expected Russia’s Gazprom, which supplies a third of European gas, to make up for the difference, but the company did not sell additional fuel on the spot market. Some suspect it wants to speed up the launch of Nord Stream 2, a major gas pipeline.
Europe has been affected by the weather in other ways as well. In the northwest of the continent, the air was stationary, which reduced wind power production. For example, in Germany, during the first two weeks of September, wind power production was 50% below the five-year average. Moreover, European utilities tend to use more coal when gas prices are high. But coal prices are also near their highest levels due to electricity demand and production bottlenecks. The cost of European carbon permits, which give the owner a certain amount of greenhouse gases, is also breaking records.
States are increasing exports.
America’s gas market has responded to international demand. During 2021-H1, the country exported about a tenth of its natural gas production, up 42% from a year earlier. However, even if the US produced more domestically, it would hardly help balance the international LNG market. Gas factories in America are almost at full capacity. The same applies to liquefaction plants in other major gas-producing countries such as Australia and Qatar. Expansion of LNG plants is possible (Qatar plans to increase its capacity by 50%), but it will take many years. What can help the market in the short term? First, one of the possibilities is a replacement. Europe is already burning more coal than in the same period last year. Some power plants in Pakistan and Bangladesh have switched from LNG to oil. Secondly, an increase in supplies from Russia. But it is unclear how much more the RF can produce. Third, the weather is warmer. However, meteorologists predict a cold winter, so gas prices are unlikely to drop.