Out of Gas – Is Europe on the Brink of Another Natural Gas Crisis?

It has been a volatile spring and summer for global natural gas markets as the war in Iran has dragged on, seemingly causing prices to jump — or falter — with every headline. From an LNG perspective, the focus has been centered around the loss of Qatari LNG, which has created a global supply shortage that disproportionately affects Asia compared to other end markets. Asia’s pull for additional cargoes, however, has created a lingering and worsening problem for Europe. Low inventories there mean that high global gas prices will not only outlast the war, they could rise further if Europe struggles to keep pace with its peak demand period. In today’s RBN blog, we’ll discuss Europe’s gas storage woes and the potential ramifications as time runs out to refill inventories.

The current conflict in the Middle East began at the end of February with strikes by the U.S. and Israel on Iran, followed by Iran’s blockage of the vital Strait of Hormuz. The strait is a key passage for oil, refined products, LNG and NGLs, and its blockage left large volumes of energy commodities stranded. As a result of the blockage, Qatar, the second-largest LNG exporting nation (only the U.S. exports more), declared force majeure and shut-in LNG production, effectively reducing global supply by about 20%. In mid-March, Iran struck the two LNG trains co-owned by ExxonMobil at QatarEnergy’s Ras Laffan complex, taking 12.8 million tons per annum (MMtpa; ~1.7 Bcf/d) of LNG offline for years. (See Eyes of the Ranger for more on the conflict and its impact on LNG.)

Backing up a bit, while we colloquially refer to Asia, Europe and other LNG-consuming countries as the “global gas market,” it’s important to note that Europe and Asia are very different when it comes to gas consumption. In Asia, “gas” essentially just means LNG, but Europe features a robust pipeline grid and underground gas storage, similar to the U.S., albeit on a smaller scale. Europe has a small amount of domestic production (although primarily from Norway, which is outside the European Union, or EU) and imports LNG. It also piped in gas from Russia prior to the 2021-22 crisis (see Beyond the Sea).

At the end of last winter, global gas prices, using the Japan-Korea Marker (JKM, blue line in Figure 1 below) and the Dutch Title Transfer Facility (TTF, yellow line) were in the $10-$11/MMBtu range, but immediately shot up to the high teens after the war with Iran began. Since then, prices have largely bounced between $15-$20/MMBtu, with a few blips just above or below that range. The volatility in prices has been headline driven, falling each time it looks like peace talks may succeed, then climbing when the headlines turn the other way. U.S. gas prices (Henry Hub; orange line) have not been impacted by the war, continuing to trade on U.S. market fundamentals and remaining in the $2.50-$3.35/MMBtu range. While global gas prices will fall when the conflict ends and the Strait of Hormuz returns to normal traffic, it might already be too late for Europe to stave off a storage crisis heading into this winter.