Global natural gas markets are tightening this winter, leading to higher costs for LNG supplies to Europe, which is preparing for what could be a colder season than the past two mild winters.
In recent weeks, Europe has increased imports of liquefied natural gas (LNG), particularly from the United States, where natural gas prices at Henry Hub are much lower than Europe’s benchmark, the Dutch TTF Natural Gas Futures. With the peak demand season approaching in the northern hemisphere, Europe is competing with Asia for LNG supply, driving up prices and discouraging some buyers in South Asia from purchasing LNG cargoes on the spot market.
Europe, however, has little choice but to secure more LNG to meet rising demand as colder weather sets in. The situation is further complicated by geopolitical uncertainty surrounding gas supply. The European natural gas market has been on edge for weeks, with several factors contributing to instability. These include the start of the winter heating season, unusually low wind speeds in northwestern Europe, a dispute between Austria’s OMV and Russia’s Gazprom over gas deliveries, and the expiration of the gas transit deal via Ukraine on December 31, 2024. Ukraine has said it will not negotiate an extension of the agreement with Russia.
As a result of these factors, the Dutch TTF Natural Gas Futures have surged to a two-year high in the past three weeks, reaching $51.35 (49 euros) per megawatt-hour (MWh) by November 22. This marks a nearly 40% increase in Europe’s benchmark gas prices since September. The price is nearly five times higher than the U.S. benchmark, making European LNG imports significantly more expensive.
The widening price gap between Europe and the U.S. has led more U.S. exporters to send LNG to Europe, where they can get a better return. This price disparity is expected to continue to drive more LNG shipments to Europe during the winter season. At the same time, higher European prices are diverting LNG cargoes originally intended for Asia. In recent weeks, at least 11 cargoes have been rerouted from Asia or Egypt to Europe, according to vessel-tracking data from Argus and Vortexa.
Despite the higher prices, Asia is also feeling the pressure. Spot LNG prices to North Asia have risen, hitting $15.30 per MMBtu last week, the highest level this year. As a result, some Asian buyers, particularly in India, have scaled back imports due to the rising costs. However, China’s LNG demand remains stable, supported by comfortable inventory levels.
Europe, on the other hand, has no choice but to increase its LNG imports. With the uncertainty surrounding the future of Russian pipeline gas after January 1, and forecasts pointing to a colder winter than the previous two mild ones, Europe must secure more LNG at higher prices. As a result, November LNG imports into Europe are expected to reach 9.16 million metric tons, the highest volume since February and significantly higher than imports in September and October. A large portion of this is expected to come from the U.S., with estimates suggesting around 4.32 million tons.
In contrast, Asia is set to import a smaller overall volume of LNG this winter, with U.S. LNG imports expected to be lower as price-sensitive buyers in South Asia retreat from the spot market. China’s LNG demand remains steady, but overall demand in Asia is subdued due to higher prices.
The global natural gas market is facing tighter supply this winter, which could lead to higher prices and potential price spikes, according to the U.S. Energy Information Administration (EIA). Weather forecasts suggest that regions in the northern hemisphere could experience colder temperatures, with a possible shift from El Niño to La Niña, which is typically associated with colder and drier weather in the Northern Hemisphere. The European Centre for Medium-Range Weather Forecasts predicts a colder winter for Northwest and Central Europe, which could further tighten the market and drive up prices.
As of late November, forecasts point to a colder winter in Europe compared to the past two exceptionally mild winters. The combination of colder temperatures and the end of the gas transit deal via Ukraine will place additional strain on the market, forcing Europe to pay more for LNG supply.
While there are no immediate warnings of a natural gas shortage for the 2024/2025 winter, Europe’s energy security will come at a higher cost this season.
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