​Natural Gas Shortages

​A long, cold winter has drained natural gas stocks in the US and in Europe and utilities are struggling to build them back up. As we approach mid-summer, there have been unforeseen supply disruptions in conjunction with hot weather and heat waves causing more drawdown on stocks. The situation could get worse when demand peaks in winter.

​The gas market has long been segmented between geographical regions, but the ramp-up in new supply of liquefied natural gas (LNG) and growing liquidity in spot trading over the past several years has helped transform it into a global market. This evolution comes at a price, as Europe and North Asia now compete for a finite supply of LNG, which results in bidding wars that can cause spot rates to surge.

Supplies are already very tight  coming into the summer months and this could get worse if there is a cold winter. Currently, there is strong competition between Europe and Asia and that is driving prices higher. European gas inventories are the lowest in more than a decade for this time of year, with the region’s benchmark surging to the highest in almost 13 years, while rates in the U.S. and Asia have jumped to the highest seasonal level in years.

There have been surpise developments in China too as they are set to become the world's top importer of LNG for the first time this year, overtaking Japan. China is stockpiling supplies of LNG in order to power its booming economy and help it shift away from dirty fossil fuels such as coal. The demand from China over the last few years has outstripped even the most bullish analyst estimates. 

But as we've seen, the LNG market is very competitive between Asia and Europe and Asian end users are increasing prices to attract supplies away from Europe. Consequently, Europe’s end-users have been forced to depend more on Russian pipeline supplies. Yet Gazprom PJSC’s unwillingness to ship extra gas via Ukraine has been one of the key factors for surging prices at the Dutch Title Transfer Facility, the spot benchmark for Europe, to the highest level since 2008. Analysts see TTF prices continuing to rise through 2021 with strong demand.

The sitatuation is exercerbated by the energy demands caused by extreme weather. Last winter in Asia was bitterly cold and now there are heat waves in Western U.S. as well as severe droughts across the globe that are reducing hydro output. 

With these factors in the melting pot, and memories of record-high prices in the Asian spot LNG last winter, importers in China, Japan, South Korea and Taiwan are buying up shipments for delivery between Novemeber and February. Chinese importers got their knuckles wrapped last year for not being prepared enough so it is highly unlikely they'll want a repeat of that.

The Japanese government last month asked utilities to ensure stable fuel supplies this summer and winter amid forecasts for abnormally thin power reserves. Traders at Japan’s biggest importers said that they have been under more pressure to stock up on fuel and even restart retired gas-fired power plants.

In the U.S., Henry Hub futures prices have more than doubled over the past year to the highest seasonal level since 2014. Inventories are 5.8% below normal for the time of year, the widest deficit since 2019 on a seasonal basis, signaling tighter supplies for next winter.

Shipping restraints could also add to supply issues this winter with the chances of congestion in the Panama Canal running high. This will force U.S. LNG cargoes enroute to Asia to take a longer route around the Cape of Good Hope or the Suez Canal, which again, will limit availability. 

Can these supply issues will resolved ahead of time? If the Nord Stream 2 pipleine is started early, then this could help to avoid a supply crunch and add much needed supply to Europe. However, the pipeline that connects Russia to Germany has been plagued with delays because of U.S. sanctions. Currently, the pre-commissioning work is underway but there are no guarnuntess of this pipeline being completed in time.

Of course, the weather has the last say in this and if there are milder winters across the globe, then inventories will go further. However, we'll have to wait and see on that front. In the meatime, it is highly probable that supply will remain tight for several years as the industry  makes up for the lack of new supply investment in 2020 and the market catches up with strong demand.