By Dr John Sydenham.
What is causing the spike in Natural Gas prices?
Some commentators are blaming it on COVID but the fall in demand in 2020 was about 80 billion cubic meters which is only about 2% of normal demand:
The problem looks, superficially, like one of supply. US Gas production was hit badly by Hurricane IDA:
The fall in US daily production has reduced global supply by about 4 billion cubic meters in 30 days, and is failing to recover fully so would amount to half the loss due to COVID in a year. The North Sea gas fields have also had serious production problems in the UK and in Norway.
However, the Russians have been pumping gas at record levels for the time of year:
This rate of production would make up for the US and North Sea shortfall. So supply is not a serious problem.
Russia and the USA are the key players in the gas market:
So what is going on? Supply is not too bad and demand is only as expected yet prices have tripled from historical levels (prices were anomalously low in 2020).
Hurricane IDA and North Sea production problems mean that the US and UK are especially exposed to the recent price rises. Much of the price rises are due to Asian, especially Chinese, investment in the futures market. The investors in this market are agreeing to pay very high prices for gas in the future. This is grim news for the gas price because there is a commitment to pay high prices for perhaps a year or so. China has opened several futures markets over the past couple of years and is probably setting the global gas price.
All of this is happening against the background of the COP26 climate conference. Were countries serious about cutting their dependence on hydrocarbons the futures price of gas should be going down. On the basis of current demand and price movements we should not expect climate change targets to be met whatever the rhetoric.
There are three alternatives for what is happening. The first is that gas production had become inelastic because of hurricane IDA and Norwegian/UK production problems. The second is that there is not enough gas production to satisfy expected Asian demand. The third is that China is launching an assault on the global economy, especially the USA and UK, in preparation for launching an attack on Taiwan and the South China Sea next year.
There is plenty of gas so Asian demand will, in the longer term, be met but the lack of investment in production due to the low prices of 2019-2020 may be creating a temporary blip.
Given that Russian production is filling in for US, UK and Norwegian shortages it is peculiar that China is buying so much gas at such a high price over the coming months. The advantage of using the futures market to destabilise gas prices is that it costs relatively little until the contracts mature. The way to avoid payment is "force majeure" - start a war.
Ultimately we can never know the future until it happens. The current gas prices could be the result of temporary blockages in supply or something more sinister. However, we can be fairly certain that climate change targets will not be met.
The UK has been particularly badly hit because it lacks gas storage facilities. This is because it is interconnected with pipelines to the Norwegian and Dutch gas fields so it would need a "double whammy" of North Sea production problems across Norway and the whole North Sea and a global energy price crisis to expose our lack of gas storage... The high prices are a temporary "blip" and cannot be sustained against the inevitable rise in supply that will occur over the next year on the back of all those futures contracts. Once Nordstream2 is on stream and the North Sea is back in full production prices will fall in the UK, but slowly.
See Knoema for more information.
Postscript: It might seem like a conspiracy theory to suggest that China is deliberately unsettling the global economy but COVID was almost certainly a lab escape (whether the virus was part of a collection of wild viruses or engineered is in doubt), BLM was a Maoist movement supported by China that played its role during the US election and to divert attention from the Uyghur genocide then disappeared from view and now China is creating the high prices for gas from its huge trove of foreign exchange. All in the past 2 years. This could all be coincidence or the opening moves in a South China Sea confrontation. I hope it is coincidence.
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