Last year, during the gas crunch in Europe, commodity traders made billions on the heightened price volatility that ruled for most of the year.
Trafigura made record profits of $5.5 billion. Vitol also posted a profit record, at $15 billion. Glencore did not buck the trend, either, also booking a record result. For commodity traders, 2022 was as good as it was for Big Oil.
Now, with winter on the way, gas prices in Europe are becoming hypersensitive to everything, and traders are flocking to the continent to take advantage of that hypersensitivity. The twist: the influx of new players in the gas market is boosting price volatility all on its own.
“The increased presence of these newer actors in the European market is now itself contributing to volatility in the market with major price swings this summer,” Energy Aspects’ head of European gas and global LNG, James Waddell, told Bloomberg this week.
Indeed, this summer saw some swings in gas prices, but at the time, those were explained by hotter-than-usual weather and production outages in Norway. Then there was the Australian LNG workers’ strike that also prompted a price surge, although it was nowhere near the levels that we saw last summer when Russia turned off the Nord Stream tap.
All that was before peak demand season, which is the winter. Right now, prices may seem stable, with media repeatedly reporting that Europe’s gas storage facilities are full well ahead of schedule. Yet traders know that these storage facilities cannot cover any European country’s consumption for any length of time. All it would take for prices to spike again would be an early cold spell as Asia also stocks up on LNG for the winter.
If traders are coming to Europe to get greater exposure to gas, then volatility is not going away anytime soon, regardless of the European Union’s efforts to reduce it by pretty much any means necessary.
There was the joint gas buying that the EU is assuring us worked so well everyone wants in on it. There were the consumption curbs in many European countries, notably Germany. There were, finally, the negotiations with Azerbaijan for greater volumes of Caspian gas, which have currently been put on hold due to suspicions that Baku may be guilty of ethnic cleansing in the Nagorno Karabakh region.
It is no wonder, then, that traders are coming to Europe all the way from, for example, Brazil. According to the Bloomberg report on the trend, Brazil’s biggest investment bank, BTG, managed to place several gas contracts in Europe that it couldn’t place at home because they’d become useless.
BTG, the report notes, had bought the gas to ensure power generation during a period of low hydropower output, but when the drought ended, BTG got saddled with unused gas. What better place to sell it than constantly gas-hungry Europe?
According to Wood Mac, gas prices in Europe will decline next year thanks to lower consumption from the industrial sector. Of course, that would only come true if winter is not its usual cold self this year. Then, in 2025, Wood Mac analysts see the European gas market tightening again as Russia’s gas transit deal with Ukraine expires.
Whether this forecast will materialize or not remains to be seen. Until then, volatility will remain a constant companion of the European gas market, attracting ever more interest from traders eager to get a piece of the action. Gas storage may be full now, but when the withdrawals begin, the gas market will heat up once again—right when it heats up in Asia as well.
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By Irina Slav for Oilprice.com
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