The oil markets have been enjoying a period of sustained rally, thanks to a stream of positive factors including somewhat successful compliance to agreed production cuts, a partial rebound in oil demand as well as growing optimism about a possible extension to the OPEC+ cuts. Brent prices briefly touched $40/barrel on Monday, a level they last touched several months ago with WTI looking to also breach the psychological level if OPEC+ signs off on extensions when it reconvenes on June 10.
The same, however, can hardly be said about the natural gas situation.
Natural gas prices are still flirting with decade-lows courtesy of a stubborn supply overhang thanks to a deluge from shale fields and weak demand due to unfavorable weather.
In fact, the supply glut has become so bad that even a leading producer turning off the taps has done little to boost prices. Natural gas prices have barely barged after Russia's national oil producer (NOC), Gazprom PJSC, cut off shipments through a key link via Belarus and Poland.
Dutch TTF Gas Futures (Euros per Megawatt-hour)
Source: Intercontinental Exchange
Last week, Russia completely turned off flows from the 2,607-mile-long Yamal-Europe pipeline that runs across Belarus, Poland, and Germany with a capacity of 33 bln cubic meters of gas per year, yet the markets hardly took notice with prices remaining severely depressed.
With the expiration of a long-time transit deal now looming, Gazprom will have to book capacity to use the key pipeline, meaning there will be more days when there will be zero flow from the said pipeline. But don't expect anything much to come from it.
Related: Saudi Arabia And Russia Agree To Extend Production Cuts
That Gazprom, one of Europe's lowest-cost producers, is also being forced to hold back supplies is a clear indication of how dire the natural gas situation has become. Prices at the Dutch Title Transfer Facility, a virtual trading point for natural gas in the Netherlands and Europe's biggest traded market, plunged to ~$40 per 1,000 cubic meters in May. That's considerably lower than the $47 on average per 1,000 cubic meters that Gazprom forks over as transit costs for the pipeline.
Gazprom's cuts are temporary, with the company likely to ramp up exports once it snags other long-term, low-cost transit deals. Still, the giant producer has reported that its natural gas exports in the current year are likely to drop to 167 billion cubic meters from last year's near-record of 199 billion cubic meters.
Gazprom's already grim situation is not being helped by the loss of a key customer either.
U.S. LNG Cancellations
During the first quarter, Turkey's natural gas imports from Gazprom tumbled 72%, with experts blaming a political tussle between Ankara and the Kremlin in Syria and Libya for the growing bad blood. The U.S. has emerged as the winner, with the country's LNG exports to Turkey tripling to nearly a million tons--or 48 billion cubic feet of natural gas-- over the timeframe.
Unfortunately, fierce competition from Russia is likely to throw a monkey wrench on America's plans to become Europe's leading supplier of natural gas.
U.S. LNG exporters have been recording a swelling tide of order cancellations from European buyers thanks to higher LNG prices on Henry Hub compared to prices at the Dutch Title Transfer Facility. About 75% of U.S. natural gas production comes from its shale industry, a sector that's currently facing an uncertain future thanks to crippling levels of debt and persistently low energy prices.
Related: Bahrain To Speed Up Development Of Huge 80 Billion Barrel Oil Reserves
The U.S. has been trying hard to gain more access to the EU market but has come up against a tough customer in Russia, a country that enjoys close proximity and better integration with European markets. Over the past few years, Russia has been consolidating its position as the EU's energy top dog by expanding its network of gas pipelines in a bid to boost its exports to the region. This has not gone down well with the Trump administration, which has, at the same time, been heavily promoting its ''Freedom Gas.'' Indeed, one such project, the Nord Stream 2, has come under intense fire with Trump in December threatening to sanction any firm that lends a helping hand in its construction.
Natural gas producers lack a strong organization like OPEC that can enforce production cuts with the Gas Exporting Countries Forum (GECF) being much less vocal than its oil counterpart. However, there are signs that countries are beginning to independently cut supply with Norway, another top gas exporting nation, lowering its flows by 11% during the first quarter.
Meanwhile, U.S. LNG exports declined to 5.6 billion cubic feet per day in the final week of May after averaging 6.7 Bcf per day during the first three weeks, marking the lowest level of LNG feed gas deliveries in eight months, despite the commissioning of an additional 2.0 Bcf/d baseload of new liquefaction capacity over this period.
Natural gas producers appear to have dodged the oil price war that sunk the oil market-- but also helped to restore some sanity. However, they need to do a lot more than they are currently doing, otherwise, they risk remaining in a world of pain much longer than some can stay solvent.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More
Comments
When OPEC was founded in Baghdad in 1960 to defend the interests of its oil-producing members, nobody thought it will last and that rivalry and conflict among its members will undermine the organization and lead to an early demise.
Yet sixty years later, OPEC has not only survived strife, two major wars among its members and a most destructive coronavirus outbreak but it has also emerged stronger with its efforts to stabilize the global oil market and prices acknowledged globally even grudgingly by the United States.
Major gas producers around the world should aim to emulate OPEC+ success by transforming their 12-country Gas Exporting Countries Forum (GECF) into an OPEC-like organization for gas.
Based in Doha and led by Russia, Qatar, and Iran, GECF was founded in 2001, four decades after OPEC. A key reason that it has been unable to control gas prices is that it lacks OPEC’s production-quota system. Instead, GECF members try to influence gas prices by coordinating their policies.
However, a growing gas market and a changing geopolitical landscape mean that GECF has the potential to develop into a gas organization with a lot of clout in the global gas market similar to OPEC’s. GECF leader Russia is confident that such an organization could succeed as OPEC has done.
But before GECF can transform itself into an organization capable of controlling gas prices, the market must first become global. This is already happening with growing production of LNG around the world. An estimated 34% of LNG is now traded on spot markets where prices are not linked to those of oil.
Today’s glut of natural gas could lead to integration of the market, with the big players becoming even more powerful. The continuing surge in LNG capacity is also likely to accelerate the process of delinking gas and oil prices. GECF certainly has the clout to pull it off: It controls 70% of the world’s proven gas reserves.
If GECF transforms itself into an OPEC-like organization for gas, the biggest winner is likely to be Russia. Its role in OPEC+ has already made it a global force in setting oil prices along with OPEC leader Saudi Arabia. If GECF can equally set gas prices, Russia could assume an almost unrivalled role in international energy geopolitics.
Still, from time to time, the interests of major gas producers particularly LNG producers will clash leading to a gas price war against each other similar to Saudi Arabia’s recent oil war against Russia.
But in the final analysis gas producers will eventually come to the conclusion that cooperation rather than strife could help bolster gas and LNG prices from which all of them will benefit.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London