Natural Gas Price Jump: What Happened and Will the Spike Last?

PoundSterlingLIVE - European natural gas prices surged by as much as 40% on Wednesday, before closing the day 27% higher, in a move that reignited fears of another potential gas-driven inflationary crisis for European households and industry.

The spike in European TTF benchmark prices meant UK wholesale prices also surged, given the interconnectivity of these two gas markets.

What caused the rise in gas prices and, importantly, are they likely to last?

The cause of the gas price rise appears to be news that Australian gas plant workers could soon go on strike, at a time when Japan's gas storage levels are unseasonally low.

This is a big deal given the impacted sector accounts for as much as 12% of global Liquified Natural Gas (LNG) cargoes.

"North West Shelf, Pluto, Gorgon and Wheatstone LNG plants accounted for ~12% of global LNG exports last year according to ship‑tracking data. With the northern winter season (1 October 2023 to 31 March 2024) fast approaching, any sustained outage at these facilities threatens to meaningfully tighten traded gas markets," says Vivek Dhar, an analyst at Commonwealth Bank of Australia.

Workers at Woodside Energy Group and Chevron (NYSE:CVX)'s LNG facilities in Australia voted to strike on Wednesday, Australian media reported.

About 99% of 180 production employees at Woodside’s facilities voted for action, including indefinite strikes, and they shall be soon joined by hundreds of other employees at Chevron’s facilities, Australia's Financial Review newspaper reported.

Unions representing workers at Chevron’s Wheatstone and Gorgon LNG facilities have filed for a protected action ballot for plant workers on Tuesday.

Dhar says if the outcome mirrors Woodside’s result, LNG production at Chevron’s LNG facilities could be disrupted soon too.

He points out that industrial action at Shell’s Prelude Floating LNG facility lasted 76 days last year and gas markets are justifiably worried over industrial action at LNG facilities.

But Dhar points out that it's not just Australia that is driving supply concerns.

Peru LNG (~0.8% of global LNG exports in 2022) doesn’t appear to have loaded a cargo since 25 July. U.S. LNG facility Corpus Christi (~4% of global LNG exports in 2022) is running 15% below its average utilisation rate.

"Some demand side factors have also pointed to a tighter market. Japan’s LNG stockpiles are currently 7% below the 5‑year average," says Dhar. Japan accounted for about 18% of global LNG imports last year.

Will these price spikes last? Of course much depends on the industrial action underway in Australia and how this is resolved.

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But another key factor here is the state of Europe's gas markets where storage is well above five-year averages, even as gas is being shipped to empty facilities in Ukraine as utility suppliers look for additional storage.

"Europe’s gas stockpiles will ultimately determine how shortage fears materialise in coming months. Europe’s gas storage levels were 87% of capacity at 6 August," says Dhar.

"The ample headroom means that Europe is most likely to enter the winter season with more than enough gas. Europe has been able to mitigate the impact of lower Russian gas pipeline imports this year by increasing LNG imports and reducing gas use," he adds.

He notes too that Europe was in a much more vulnerable position last year with gas storage levels tracking in line with the 5‑year average (2017‑2021) and Russian gas pipeline imports were shifting even lower.

"We see little risk of prices returning to those highs, let alone above EUR 100/MWh, given how high Europe’s gas storage levels are tracking," says Dhar.

An original version of this article can be viewed at Pound Sterling Live