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European natural gas prices experienced a significant surge of nearly 40% on Wednesday. Traders became wary of potential disruptions in global liquefied natural gas supply from Australia, leading to a shift in their expectations of further price decreases.
The European benchmark, known as the Title Transfer Facility, saw prices rise to over €43 per megawatt hour, up from almost €30 the previous day. This surge marked the highest point since mid-June.
The price increase was triggered by reports of planned strike action by workers at key LNG plants in Australia. They were demanding higher pay and better job security. Furthermore, some traders were closing out their bets that gas prices would fall, further exacerbating market movements.
This surge in prices highlights that despite gas storage levels in the EU nearing capacity, the energy crisis that has plagued the continent for the past two years is far from over. Markets remain apprehensive about supply vulnerability.
Although Australian LNG supplies rarely reach Europe directly, the EU has increasingly relied on global seaborne cargoes of LNG to compensate for the reduction of Russian supplies since the conflict in Ukraine.
Analysts have noted that markets remain cautious of potential supply disruptions, despite prices being significantly lower than last summer’s record highs of over €340/MWh caused by the reduction in Russian pipeline supplies.
“Even if gas storages are full, it doesn’t necessarily indicate that everything is fine,” said Callum Macpherson, head of commodities at Investec. He emphasized the uncertainty surrounding the upcoming winter and mentioned the existence of significant risks related to Europe’s gas situation.
Last year, the EU became the largest LNG importer globally as it had to replace lost Russian pipeline gas. Russia once accounted for about 40% of the EU’s gas demand.
Australia plays a critical role as a supplier to Asia, potentially putting it in competition with Europe for available cargoes in a tighter market.
Consultancy ICIS noted that “a cut in Australian supply could mean Asian buyers turn to other sellers, such as the US and Qatar, who can pivot between the markets.”
Similar price surges have occurred a few times this year, usually followed by a decline in gains later in the day. On Wednesday, oil prices also rose, with Brent crude, the international benchmark, reaching $87.65, its highest level since January, due to production cuts by Saudi Arabia and Russia.
Rising energy costs could pose challenges for central banks in controlling inflation.
EU’s gas storage facilities, crucial for meeting winter demand, are now nearly 90% full. This level was the European Commission’s goal to achieve by the beginning of November. Traders anticipate that the facilities will reach full capacity by September.
Nevertheless, analysts at Citigroup argued that if the Australian strikes proceed and continue throughout winter, “European natural gas might avoid having its inventory breaching storage capacity limits.” The Wall Street bank added that European prices could double and reach €62/MWh by January if the strikes in Australia persist until the start of winter or beyond.
Additional reporting by David Sheppard in London
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