The only product that will keep on skyrocketing

As crude oil and other commodity prices plunged last week amid growing recession fears and less liquid markets this summer, a commodity is bucking the trend and continuing to rise : European natural gas.

Benchmark gas prices in Europe on TTF’s Dutch hub hit their highest level in nearly four months earlier this week. Prices have soared 700% since the start of 2021. And we probably haven’t seen the biggest rally yet, analysts say.

Gas prices in Europe have reversed the trend in recent weeks

Gas prices began to soar amid the energy crisis in the fall of last year. Then the crisis escalated to a whole new level after the Russian invasion of Ukraine in late February, which prompted the EU to rush to replace Russian gas supplies as much as possible, while Russia reduced deliveries to major customers, including Germany and Italy, in mid-June. In the three weeks since Russia cut supplies to Europe and halted exports from the US Freeport LNG facility, European gas prices have jumped 60%.

The first-month TTF futures contract jumped 8% to $179 (175 euros) per megawatt-hour (MWh) on Tuesday, hitting its highest level since March. The price is five times higher than at this time in 2021. It is also more than 11 times above the long-term average, according to Ole Hansen, head of commodity strategy at Saxo Bank. European gas prices jumped to the equivalent of $300 a barrel of crude oil, Hansen Noted.

Meanwhile, other commodities, including oil, have fallen since mid-June as the Fed and other central banks have raised key interest rates to the highest in decades to fight the tide. highest inflation in more than 40 years, inflation that has been exacerbated by the energy and fuel boom. prices. Aggressive rate hikes have heightened fears in equity and commodity markets that a recession is looming.

The significant drop in gas deliveries from Russia to Europe, the impending two-week regular maintenance on the Nord Stream gas pipeline from July 11 and fears that Russia will not restore supply once maintenance ended, are also critical factors in fears of a recession. in the German and eurozone economies, and in all EU economies, in the very near future.

“It’s the 1970s for natural gas”

The ever-changing energy markets since Russia’s invasion of Ukraine have highlighted the fact that gas has become a truly global commodity in recent years, with strong demand for LNG in Europe driving up prices in the region and in Asia. The ability of U.S. exports to at least partially offset the loss of Russian supply also pushed the benchmark U.S. natural gas price higher. Henry Hub double in the past year. US gas prices have fallen about 40% since the Freeport LNG shutdown as more gas becomes available for US consumption.

“It’s the 1970s for natural gas,” said Kevin Book, chief executive of US research firm ClearView Energy Partners. Bloomberg earlier this week.

“The world now thinks of gas as it once thought of oil, and the critical role gas plays in modern economies and the need for a secure and diverse supply has become very visible,” Book added.

The need for diversification and the importance of gas as a global rather than a regional commodity has never been greater as Europe aims to break free from Russia’s gas grip and never depend on Moscow again for its energy supply. The EU is a long way from achieving that goal now, as Russia’s gas supply cuts have shown – Germany, Europe’s biggest economy, has warned of a ‘Lehman Brothers’ moment if the gas stops now.

Not that Europe isn’t trying – LNG import terminal projects have been activated from Greece to Germany and Finland, but it will take some time for Europe to break free from dependency Russian gas company. The EU’s goal is for this to happen by 2027.

LNG investment is back

Leaders of the G7 group of the world’s major industrial nations also stress the importance of LNG at their summit in Germany at the end of June. While reiterating their support for the climate goals of the Paris Agreement to limit global warming, the G7 leaders acknowledged that “investment in this sector is necessary in response to the current crisis”.

“In these exceptional circumstances, state-backed investments in the gas sector may be appropriate as a temporary response,” they added.

Meanwhile, LNG buyers revert to long-term contracts in order to secure the long-term supply of non-Russian gas and to hedge against soaring volatile spot prices.

“Many traditional LNG buyers will not buy gas or LNG spot, or renew or sign additional LNG contracts with Russian sellers. Spot prices have also been high and volatile, pushing many buyers into long-term contracts,” said Wood Mackenzie principal analyst Daniel Toleman. said in May.

According to Massimo Di-Odoardo, vice president of gas and LNG research at Mackenzie Wood“A huge increase in investment in LNG projects is supported by a rapid increase in European demand for LNG, with US developers already looking to fill the gap.”

Qatar is also dramatically increasing its LNG export capacity as part of the world’s largest LNG project, announced a year before the Russian invasion of Ukraine. Those last weeks, state-owned company QatarEnergy chose international majors ExxonMobil, ConocoPhillips, Eni, TotalEnergies and Shell as partners in the North Field East expansion project.

Until new US and Qatari capacity comes online in the middle of this decade, the gas market will be tight as energy trade flows change forever. The recent rise in gas prices in Europe since Russia cut supply may not be over as the EU scrambles for alternative supply to avoid a winter of rationing and recession.

By Tsvetana Paraskova for Oilprice.com

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