Yesterday, UK forward natural gas prices hit a new all-time high.
At the start of trading today, they retraced a little, but that was far from mitigating the trend that has seen wholesale prices spike 600% in the last few months. Because of Brexit and other supply shortages, some see this as only a British problem.
However, Dutch forward liquid gas prices also broke to an all-time high in the same period. Of course, it hasn’t increased as much in The Netherlands as in the UK. It’s only up a little under 500% so far this year.
Not surprisingly, natural gas retailers and utility companies are experiencing severe problems due to the high prices driven by scarcity.
What happened to supply and demand?
Generally, when there is an increase in price that is dramatic, you would expect a rush of new suppliers to the market to take advantage.
Production and distribution mechanisms that might have been too expensive before can be pressed into use with higher margins. But, that’s not the problem. The problem is global.
In its most recent report, the IEA warned that more energy consumption is shifting to electricity faster than renewables are coming on line.
Expectations are for coal-fired power generation to reach a record by the end of the year. Not only that, but most long-term weather forecasts are predicting a cold winter in Europe this year.
Geopolitics come into play
At their two-day summit, the European Council (composed of the European heads of government) made a statement talking tough on possible sanctions against Russia should it invade Ukraine.
However, a Politico report pointed out that there wasn’t much consensus on what to actually do should the worst come to happen. Particularly in regards to the gas issue, with Europe importing the majority of their natural gas from Russia.
The geopolitical tensions are pushing European companies to stockpile as much gas as they can afford. This means that what little extra capacity that would be available to push down the price is quickly bought up.
The winter is not the end of it
Usually, demand for natural gas drops as winter comes to an end. This is because there is less heating demand in Europe in the warmer months.
The thing is, the normal functioning of the grid is that as demand increases, generators bring on short-term peaking power. These generators are typically natural gas generators. They can start up, and be shut down relatively quickly.
However, this can mask organic demand increases, leading to a delay in base generation construction. While there have been some base generation projects (Slovenia’s expansion of their nuclear facilities is still under discussion), the primary focus has been on renewables.
However, renewables do not supply steady production, meaning the grid has to rely increasingly on flex-power solutions which are primarily natural gas.
Plus, there are now more electric cars going on the roads, and more factories switching from oil to electric. There are also more foundries switching from coke to electric, which means demand for electricity will only keep rising. Not just in Europe, but in the whole world.
Meanwhile, coal plants are taken off line due to environmental concerns. This is causing the gap between supply and demand to grow. With natural gas being the only way to bridge that gap, there aren’t very many indications that the current price spike will be transitory.
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