Thread by @PZeniewski

A thread on today's crazy high #naturalgas prices, with a few thoughts on long-term implications:

Gas prices have been on a wild ride of late. Several price benchmarks are sky-high. In Europe, the main spot price benchmark (the “TTF”) is a whopping €50/MWh ($17.5/MBtu). That’s never happened before. Various indices tell us Asian spot prices are above $15/MBtu, too. Yikes.

These spot prices are telling us markets are tight. Lots of reasons for this, from factory output rebounding in Asia to aircon use during heat waves to high European carbon prices pushing more gas into the power stack. Storage is low. Supply is gummed up here and there.

But it’s worth remembering that not everyone pays spot prices. Lots of gas is traded on the basis of long-term contracts where the price is indexed to oil. Around 65% of gas in east Asia is bought this way. Much less in Europe (~20%), and virtually nothing in the US.

Right now, importers drawing on oil-indexed contracts are sitting pretty. Suppliers and middlemen in spot gas trades are making $$$. Buyers that have either maxed out their contractually-agreed volumes or rely too much on spot trades in the first place are rather annoyed.

This is a big break in trend. Last summer, it was the exact opposite situation: the post-pandemic slump brought spot prices to record lows in Europe ($2/MBtu), whereas oil-indexed contract gas was still trading above $7/MBtu for much of the year.

Let's combine spot with oil-indexed gas, to see what regions actually pay for imports. This is what it looks like. Since June 2021, Europe has been paying more for its gas than customers in Asia. Why? To pry gas away from Asia. The market is doing what it’s doing.

There’s also something else going on, which may be under-appreciated: Europe’s gas market is more sensitive to global gas fundamentals than in the past. The growth in global LNG trade has anchored TTF to short-term supply/demand cycles (e.g. what's happening in US/Asia)

Europe/TTF is a victim of its own success: lots of trading going on (swaps, futures, forward purchasing). The churn rate at TTF is 90x. That’s a nerdy way of saying gas gets bought and sold lots of times before actually being delivered. All this helps buyers/sellers manage risk.

The next question is whether these market signals are durable or convincing enough to invest, or at least maintain, gas infrastructure for the foreseeable future. The short-term fundamentals say “yes!”. The long-term strategy consultant says ¯\_(ツ)_/¯

That could become a security problem: a growing disconnect between short-term fundamentals and the long-term picture, i.e. gas’ role in energy transitions (a bridge? How long? etc). Buyers hesitate to underwrite multi-billion dollar supply projects when demand is so uncertain.

And that's fair. Gas ain't cheap, especially in the emerging world where there are alternatives. It's a hard enough sell when prices are in the $5-7/MBtu range, not the double digits we're in now. Oil & gas majors have been trying to fill the gap, but can they do so forever?

So is a supply crunch looming? The winter looks pretty tight. What about after? There is upside for natural gas in all #IEA #WEO scenarios over the next few years, but that’s assuming policy is strong enough to look past these kinds of price cycles.

So, long-term, high prices can be good for: efficiency investments, finding alternatives to gas (renewables, biomethane, H2), reducing methane leaks. But they can also dampen economic growth or encourage switching to even dirtier fuels.

So gas prices are high, yes, but that’s not all that’s going on. Gas prices are also… complicated.