The extraction of oil produces natural gas which, for a long period, was regarded as a relatively useless byproduct. Flaring was the most common way to get rid of this highly flammable substance. But in recent times, natural gas has become an important and essential part of global energy systems. East Asia and Europe are especially important markets because these regions lack significant reserves of their own and are able to absorb vast quantities due to the size of their economies. The global LNG market, however, is going through turbulent times as prices have dropped significantly because of a global supply glut.
Also, the price disparity between Asian and European markets has recently shifted. Europe’s excellent pipeline connectivity with producers in the north (Norway), East (Russia), and south (Algeria) has traditionally shielded it from large price swings on the LNG market. Asian markets such as Japan and Korea, however, are largely dependent on LNG. Therefore, customers in Asia would pay a higher price and therefore receive the bulk of the cargoes. The situation has changed considerably during this heating season.
Currently, the price of LNG on the spot market is the lowest ever in Asia for this time of the year. The influx of additional volumes from the U.S. and Russia has increased the supply glut even further which has a depressing effect on prices. Relatively mild weather conditions and full inventories are driving a bear market. This has led exporters to redirect cargoes to European customers instead.
According to research group Cedigaz, Britain’s three terminals have seen higher rates of growth than China this year. And other European ports are enjoying high utilization rates with the import of LNG at an all-time high. The continent’s outstanding level of connectivity and relatively under-utilized terminals make it a good destination for surplus LNG cargoes. However, that seems to be reaching its limit. According to Peter Abdo, managing director and head of global origination and LNG at Uniper SE’s trading unit, “if you want to bring a cargo into northwest Europe, I think you are going to struggle to find capacity.” Related: Why Oil Traders Are More Bullish On 2020
The tsunami of LNG couldn’t have come at a better time for European energy security. In a normal situation the stand-off between Russia and Ukraine concerning the extension of gas transit rights, which expires at the end of 2019, would have led to a crisis on the gas market. However, the current low price of natural gas suggests otherwise. This largely has to do with storages being full and the unprecedented supply of cheap LNG.
Paradoxically, Russia also stands to benefit from the abundance of natural gas on the European market. To understand why it is necessary to view the situation from Moscow’s perspective. The construction of Turk Stream and Nord Stream 2 serve both political and commercial goals. By circumventing traditional transit countries Moscow is able to put pressure on Ukraine and reduce the risk of supply interruptions, strengthening Russia’s reputation as a reliable supplier.
Although Nord Stream 2 was scheduled to be finished before the end of 2019, the project has been delayed for several months. This puts Russia in an awkward position vis-à-vis Ukraine in its negotiations over the extension of the gas transit rights. The availability of large volumes of LNG together with relatively full storage, strengthens Moscow’s belief that Ukraine’s European allies have less to fear from a short supply disruption in case negotiations fail.
The Russian side believes that time is on their side as Nord Stream 2 will be completed within a couple of months. Ukraine, on the other hand, views the current situation as its only chance to extract concessions from Moscow before it’s too late.
Both parties are therefore increasing the pressure on their counterparts as time is running out. A potential supply disruption won’t have a devastating effect on Europe as there is plenty of gas on the market. However, the countries’ reputation is at risk. A disruption would strengthen the incentive for European customers to find alternatives to improve energy security.
By Vanand Meliksetian for Oilprice.com
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