High levels of gas reserves in Europe and the US may offer a cushion to the short-term market outlook of Natural Gas. But the long-term sentiment remains clouded.
The most volatile year ever for natural gas futures has taken another sharp turn recently. A forecast of unexpected warm weather and reports of a delay in restarting a big LNG export facility in the US were among the major driving factors. However, the commodity was one of the best-performing asset classes in 2022.
A further delay in restarting export from Freeport LNG, the second-biggest liquefied natural gas export facility in the US adversely affected the prices recently. For the past few months, price swings in natural gas were largely attributed to operations stalling and the anticipated restart at the US export facility.
This export plant, which accounts for about 20 percent of US LNG export capacity has been shut since June 8 after an explosion. Due to pending regulatory approval, the functioning of the facility has been further delayed.
Export challenges in US export hubs leave less fuel for European buyers as they are seeking to replace Russian gas. Russia is the key fuel exporter to European countries, but slashed supplies in response to the sanctions placed on the country for its invasion of Ukraine. The European buyers sought alternatives, especially from the US to meet their winter demand.
Since 2021, global gas markets have been tightened. In addition, the Russian invasion of Ukraine hit the global supply chain of energy.
The curtailment of Russian gas flows and difficulty in sourcing gas from other countries have sent global gas prices to multi-year highs. This has disturbed trade flows leading to acute fuel shortages and an adverse effect on consumers, businesses, and economies worldwide.
The benchmark US NYMEX gas futures started this year at $3.81 mmbtu but abruptly rose to $10 in August on supply concerns. However, it lost momentum and corrected down by more than 50 percent currently.
The shortage of Russian gas supplies precipitated a catastrophic energy crisis in European countries. The European benchmark TTF and the Asian spot LNG prices surged to a record high this year. The European gas prices quadrupled in August as against January levels hit businesses and households across the region.
However, global gas demand has witnessed a fall throughout the year. This is due to consumers shifting to more incentivised other fuel derivatives like coal and crude oil.
As per IEA report, Europe’s gas consumption sheds by more than 10 percent in the first eight months of 2022. Demand declined by 24 percent in November lower than the five-year average for the month. This was largely due to a drop in industrial demand amid record-high prices. Meanwhile, demand from China and Japan was almost steady while it contracted in India and Korea.
Amid supply denial from Russia and lower gas consumption, the European countries continued to cut their dependence on Russian energy. As per EU data, Russian share of gas in Europe declined to 9 percent in September from a whopping 40 percent earlier this year.
Warm weather conditions in key consumers also cast a shadow on the demand outlook as the commodity is largely used for heating purposes in western countries.
Looking ahead, in the short run, high levels of gas reserves in the US and Europe may give a cushion to the global gas market. Meanwhile, long-term sentiment remains clouded. The uncertain supply outlook from Russia, Europe’s energy crisis, weather-related demand, and US export uncertainties continue to cast uncertainty on the prospects of the fuel.
First published in The Economic Times