European gas prices have continued to make headlines across the world.
Simpson Spence Young (SSY) LNG analyst, Thanos Felios, looked at what’s behind the LNG price rise and the impact this had on the LNG shipping market.
With Europe relying on Russia for around 35% of its natural gas, the increasing geopolitical tensions between Russia and the West have continued to disrupt supplies, which have been lower than usual in recent months.
Any more sanctions on Russia from the US are likely to further impact supplies, he said.
European gas storage supplies are low. Storage is mainly used as a buffer during periods of high demand and tight supply, but today, storage is low due to two main factors:
1) The delayed and prolonged cold winter during the first quarter of last year.
2) The struggle to rebuild gas stocks last summer, due to very hot weather, as the summer of 2021 proved to be Europe’s hottest on record.
Asian power and gas demand has also been strong, which pulls LNG away from Europe. This is due to a combination of 2021 post-COVID economic recovery, the cold winter of 1Q21 and the determination of the LNG buyers not to be ‘caught short’ this winter.
This triggered a continuous price rally between JKM and TTF, which led both indices reaching all-time highs last year.
Drought problems
Severe drought in South America limited hydro-electric output and this has pulled in a significant amount of Atlantic’s LNG volumes.
In addition, various LNG facilities experienced outages, which has taken a significant volume of LNG supply off the market. ie, the Norwegian Hammerfest plant has been out of service since September, 2020.
High European carbon prices have also forced power generators to cut coal and use more gas. Carbon prices in Europe reached all times highs in 2021, as the EU reduced the supply of emissions credits, forcing highly polluting providers of energy production to reduce their reliance on coal.
Felios commented: “The very high LNG pricing environment that we are witnessing in Europe is unprecedented. The situation that we are seeing continues a rhetoric of extreme gas/LNG pricing volatility. This in turn has resulted in a more and more volatile shipping market.
"Over the last 18 months, since the end of the first European COVID-19 lockdown, LNG shipping has seen monumental highs in terms of dollar per day charter rates.
“We have also witnessed, as we are now, very low charter rates and rising shipping availability. In simple terms many more ships are staying in the Atlantic Basin (due to high EU demand) and not sailing to the Far East during the end of winter/start of spring.
“This has resulted in shorter tonne-miles and less demand for tonnage to transport the LNG molecules,” he said.
