The CEO of Vitol, a prominent global energy and commodities trading firm, expressed concerns on Wednesday about the escalating prices of liquefied natural gas (LNG) in Europe.
The European LNG prices, which are currently surpassing those in Asia, have reached a level that could potentially lead to a decline in demand, Reuters quoted Vitol CEO Russell Hardy, who was speaking at the India Energy Week conference in New Delhi.
This situation highlights the delicate balance between LNG supply and demand, and the impact of price fluctuations on the European energy market.
The high prices could force industries and consumers to seek alternative energy sources or reduce consumption, ultimately affecting the overall demand for LNG in the region.
“Europe is attracting much more LNG and the European price has overtaken the Asian price now…Typically it’s the other way,” Hardy said.
Shift in global LNG market
The surge in European gas prices has triggered a significant shift in the global LNG market.
This price increase has made Europe a more attractive destination for LNG suppliers, who are now diverting cargoes initially destined for Asian markets towards Europe.
This shift is driven by European countries’ urgent need to replace piped Russian gas supplies, which were disrupted following the expiration of the Ukraine transit deal on January 1.
Additionally, the recent drop in temperatures has further exacerbated the demand for gas in Europe, intensifying the competition for LNG cargoes and driving up prices.
Europe will have sufficient gas to replenish its gas reserves, according to Hardy.
However, he also stated that government action will be necessary to guarantee enough LNG supplies for the winter.
Carsten Fritsch, commodity analyst at Commerzbank AG, said in a report:
As there are still around seven weeks to go until the end of the withdrawal period, the filling level will fall further.
Unusual situation arises
Hardy described a highly unusual situation in the gas market where the typical seasonal price patterns have been reversed.
Normally, in a market driven by winter demand, gas prices would be higher in the winter months and lower in the summer months.
This is because demand for heating purposes surges during the winter, driving up prices.
“We’ve got a very unusual situation where the gas market is backward going into summer, so the price for summer is above the price for January next year. That’s just counter-intuitive to a winter-based market,” he said.
However, Hardy noted that the current market is behaving counter-intuitively, with summer gas prices exceeding those for the following January.
This inversion of the normal price curve suggests that there are factors at play that are disrupting the usual supply and demand dynamics of the gas market.
These factors could include geopolitical tensions, disruptions to supply chains, changes in storage levels, or speculation about future demand.
Imbalance in the market
The European Union is rightfully concerned about winter supply and keeping people warm is a major priority, according to Hardy.
There is an imbalance in supply and demand, and there is concern that winter supply won’t be sufficient without some degree of force or intervention, he said at the event on Wednesday.
The EU is developing instructions to address this issue, likely including incentives, subsidies, or negatively-priced storage, Hardy further added.
Data from Gas Infrastructure Europe quoted in the report revealed that Europe’s gas stores are currently 48.48% full, compared to 67% at the same time last year.
Although Hardy acknowledged that global supply is currently tight, he doesn’t anticipate that new policies in the US, the top producer, will significantly impact the global supply balance.
He noted that approximately 200 million tons of new LNG supply are expected to enter the market between 2028 and 2031.
Hardy added:
I don’t think the new US policies are going to dramatically change that balance out to 2030, but they may have an impact in the next decade.
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