By
Syed Raiyan Amir
Africa-Press – Lesotho. Since the early days of the Ukraine war, the global liquefied natural gas (LNG) market has experienced unprecedented price surges. This upheaval initially led to record highs in LNG prices worldwide. A recent increase in LNG production across European countries has slightly tempered the intensity of these price fluctuations. Despite this, experts at S&P Global Commodity Insights caution that the market remains precarious and unstable. They highlight ongoing concerns about the security of maritime cargo information and supply, which continue to undermine market stability.
In the wake of the geopolitical crisis, the global LNG market has witnessed significant volatility. Analysts from S&P Global Commodity Insights have observed that, while the surge in European LNG production has increased supply, price stability remains elusive. This significant equilibrium is influenced by a variety of factors, including demand dynamics, geopolitical risks, and supply chain vulnerabilities.
One of the major contributing factors to the current market instability is the continued upward movement of global LNG demand. Analysts predict that this trend will persist from the current winter season into the beginning of the next year. The heightened demand is driven by several factors, including geopolitical tensions and supply uncertainties. As a result, LNG prices have remained elevated, with market participants closely monitoring supply levels and geopolitical developments.
For instance, S&P Global Commodity Insights has recently set the benchmark price for LNG in Northwest Europe at $12.438 per MMBtu for the delivery contract dated October 29. Meanwhile, LNG prices for delivery to East Asia have been fixed at $14.44 per MMBtu. It is important to note that these prices represent a significant drop from the record high of $74.48 per mmBtu observed on August 26, 2022, in Northwest Europe. This reduction highlights the complex interactions between increased production and ongoing market challenges.
Several factors are influencing the current state of the LNG market. Aliza Bajramovich, a senior research analyst specializing in European and Russian LNG at S&P Global Commodity Insights, emphasizes that the current market balance is highly fragile. She anticipates that this fragility will continue into the winter months. Asian buyers, for instance, have yet to initiate stock replenishment due to persistently high temperatures in the region. This delay in replenishment contributes to the market’s instability, as buyers remain cautious in their procurement strategies.
In addition to regional dynamics, the global LNG market is also impacted by shifting import and export patterns. For example, Egypt has significantly reduced its LNG imports from Europe. European natural gas prices rose on September 6, with benchmark futures increasing by up to 4%, following a pause in a previous three-day decline. This increase is driven by concerns over heightened competition for fuel, particularly from Egypt, which plans to purchase 20 cargoes of liquefied natural gas (LNG) starting in October, a significant shift as the country hasn’t sought imports ahead of winter in years. This development has caused apprehension among traders regarding Europe’s gas supply, as increased demand elsewhere could limit the flow of LNG to the continent. While Europe currently has sufficient supplies, it remains dependent on global imports following Russia’s 2022 reduction of pipeline deliveries. European energy strategist Florence Schmit of Rabobank noted that winter gas prices in Europe will be influenced by rising demand, and an unusually cold winter could further drive prices up. The market is paying close attention to the recent updates concerning the expiration of the transit agreement between Ukraine and Russia and how it will affect the region’s gas supplies starting in January. Azerbaijan’s President, Ilham Aliyev, stated on September 6 that both Moscow and Kyiv have asked him to help facilitate the transit of gas through Ukraine to Europe.
South America may increase its LNG intake during the fourth quarter of this year and the first quarter of the next year. On the other hand, France is increasingly turning to nuclear power, resulting in a decreased demand for natural gas used in electricity generation. These varying trends contribute to the overall instability of the LNG market, as supply and demand factors fluctuate.
The potential expiration of the agreement for Russian LNG supply to European countries through Ukraine is a looming concern. In mid-2022, Russian state-owned gas company Gazprom significantly reduced its pipeline gas deliveries to Europe in response to international sanctions imposed on Russia and its corporations following Moscow’s invasion of Ukraine. This move led to record-high gas prices and a sharp drop in gas demand across Europe. Despite this, Gazprom has continued to send around 42 million cubic meters of gas per day through Ukraine and similar volumes via the TurkStream pipeline, which crosses the Black Sea to Turkey, supplying Serbia and Hungary.
Kyiv has repeatedly signaled that it does not plan to renew the gas transit agreement with Russia, which is set to expire on December 31, 2023, despite Moscow’s indications that Gazprom is willing to continue these shipments. A report from Norwegian consultancy Rystad suggests that Europe may need to import an additional 7.2 billion cubic meters of liquefied natural gas (LNG) next year to compensate for the loss of gas transiting through Ukraine, with potential supply disruptions occurring earlier than expected. Regasification terminals in Poland, Germany, Lithuania, and Italy could redirect these volumes to the hardest-hit countries, including Slovakia and Austria.
According to Rystad, Austria, Slovakia, and Moldova are the European countries most reliant on Russian gas transiting through Ukraine, having imported around 5.7 billion cubic meters (Bcm), 3.2 Bcm, and 2 Bcm of Russian gas respectively in 2023.
For Austria, which was the largest recipient of Russian gas last year, the focus would shift to increasing imports from Germany via the Oberkappel entry point, which is expected to reach its maximum annual capacity of 8 Bcm. However, this may still fall short of covering Austria’s 8.53 Bcm annual import shortfall. From January 2025, Russian gas transits from Austria to Hungary are expected to decrease, and exports to Italy will cease. Austria would also need to import up to 2.5 Bcm from Italy through the Arnoldstein-Tarvisio crossing.
Slovakia, without Russian gas, would be positioned at the tail end of Europe’s gas import chain, requiring about 4 Bcm of gas to be supplied through the Lanzhot entry point on its border with the Czech Republic. With Poland’s additional regasification capacity only becoming available in 2025, the full halt of Russian gas transits through Ukraine could lead to a reversal of gas flows from Austria into Slovakia to meet its demand, as noted in the report.
To Rystad, Moldova is likely to face less impact from the impending halt in Russian gas transit after securing a one-year exemption from Ukraine, allowing the transit of Russian gas until the end of 2025. This gas is sent through Ukraine to the pro-Russian separatist region of Transnistria, where it powers a large plant that supplies most of Moldova’s electricity.
Moldova already receives gas for its own use from Romania through reverse flows via the Trans-Balkan pipeline, which connects Ukraine to Romania, Bulgaria, Turkey, and Greece. Moldova can access gas from the Southern Gas Corridor in Azerbaijan, as well as Turkish and Greek LNG import terminals, through the same route, Rystad noted.
Italy has already largely achieved independence from Ukrainian gas transit and has several options for replacing Russian pipeline gas. However, it would need to secure about 3.75 billion cubic meters (Bcm) annually to supply Slovakia and Austria. Potential sources include Snam’s Ravenna floating storage and regasification unit, which will operate at 5 Bcm per year starting in 2025, and an additional 1.23 Bcm of gas that could be imported by pipeline from Tunisia to supply these countries.
Rystad’s report emphasizes that while sufficient gas supplies can technically meet the needs of the countries affected by the transit halt, the transition may not be smooth. Rystad mentioned that a price reaction could occur when the gas flow stops, especially if it happens earlier than anticipated. The readiness of affected nations varies, with some stress points, such as the Horgos entry point between Serbia and Hungary on the Balkan Stream, which is part of the TurkStream extension.
Regarding Hungary, the country is expected to face even greater dependence on Russian gas as alternative import options become limited due to the changing dynamics of pipeline gas in Eastern and Southern Europe. If Moldova is supplied via the Trans-Balkan pipeline from Romania, that route’s capacity will be fully utilized, cutting off gas flows to Hungary from Romania. Furthermore, Austria will be unable to forward gas to Hungary, and Croatia won’t have additional regasification capacity before 2025 to assist Hungary. As a result, Hungary will rely entirely on increased gas volumes via the TurkStream pipeline, which brings gas through Bulgaria and Serbia.
Traders and analysts have raised alarms about the possibility of reduced Russian LNG supplies in the future, which could further drive up global LNG prices. The expiration of this supply agreement could exacerbate existing market uncertainties and contribute to price volatility.
As of August 28, natural gas reserves in European countries were reported to be 91.98 percent full. The European Union had met its 90 percent natural gas reserve target ahead of the November 1 deadline. Despite this achievement, market participants remain cautious about potential instability in the LNG market. Concerns about the reliability of gas supplies from Algeria and Norway, as well as delays in gas pipeline maintenance from Libya, continue to cast a shadow over the market.
While increased LNG production in Europe has provided some relief to the market, the global LNG landscape remains fraught with uncertainty. The interaction between rising demand, geopolitical tensions, and supply chain vulnerabilities creates a complex and volatile environment. Market participants and analysts will need to closely monitor these factors to facilitate the ongoing challenges and uncertainties in the global LNG market.
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