Natural gas, LNG prices rise on Middle East supply fears
Analysts have warned that a prolonged rise in natural gas prices due to the ongoing war in the Middle East will hamper European growth and hit some Asian economies hard..
Global gas prices rose this week on fears of prolonged disruptions to energy flows through the Strait of Hormuz, a key shipping route between Oman and Iran. which handles about one-fifth of global LNG trade — so The Iran conflict is escalating.
Dutch Title Transfer Facility (TTF) Futures, Europe’s benchmark gas contract, rose 35% on Tuesday to more than 60 euros ($69.64) per megawatt-hour. During the week, prices are about 76% higher.
The Northeast Asia LNG benchmark, the Japan-Korea-Marker (JKM), which captures deliveries to Japan, Korea, China and Taiwan, hit a one-year highand was last seen at around 43 euros per megawatt-hour. UK natural gas was also this high.
Qatar, one of the world’s largest LNG producers, halted production on Monday following Iranian drone strikes at Ras Laffan Industrial City and Mayside Industrial City. Goldman Sachs estimates that the pause will reduce global LNG supply by about 19% in the near term.
A senior official in Iran’s Revolutionary Guard later said the country had Strait of Hormuz closed to all ships, and warned that any vessel attempting to pass through the Channel would be attacked. According to the report of Fox News, the US, however, said that this route is open.
Squeeze the supply
Europe and much of Asia are more exposed to a potential gas price shock than the US, which benefits from both domestic shale and LNG production.
According to Chris Wheaton, oil and gas analyst at Stifel, LNG accounts for about 25% of Europe’s total gas supply. With roughly 20% of global LNG production sitting behind the strait, a prolonged disruption could cause a supply disruption comparable to the shock after Russia’s 2022 invasion of Ukraine, they said in a note.
“We are more concerned about European gas prices than oil prices,” Wheaton said.
Shares of the Norwegian energy giant equinoxOne of Europe’s biggest natural gas suppliers hit a 52-week high on Tuesday, adding more than 2%, after closing up more than 8% the previous session.
equinox
Goldman Sachs warned in a note published on Monday that a month-long stoppage in flows from Hormuz risks pushing TTF and JKM prices up to 74 euros per megawatt-hour. This level was “largely responsive to natural gas demand” during the 2022 European energy crisis.
European gas prices eventually peaked at 345 euros per megawatt-hour in August 2022. Russia arms its natural gas exports In response to the European Union’s sanctions, supplies were slashed, driving up domestic energy bills and creating a cost-of-living crisis across the continent.
In a separate note later on Monday, Goldman raised its April TTF forecast to 55 euros per megawatt-hour from 36 euros per megawatt-hour, now averaging 45 euros/MWh for the second quarter.
‘adverse effects’
Patrick O’Donnell, chief investment strategist at Omnis Investments, said LNG was now a major area of concern for Europe’s wider economy. “It could have more negative effects on the European economy and reindustrialization than the market had hoped we would see,” O’Donnell told CNBC’s “Squawk Box Europe” on Monday.
Indeed, Goldman Sachs analysts led by Sven Jari Stehn noted that “the effect of high energy prices on GDP is negative for most countries, except for Norway, which produces and exports oil.”
Goldman Sachs estimates that a sustained 10% rise in energy prices over four quarters would cut GDP by 0.2% in both the UK and the euro area. Switzerland, which relies more on nuclear and renewables, will be flat, while Norway – an oil exporter – will see a 0.1% increase.
In contrast, Goldman analysts see “limited upside risk” to US natural gas prices.
Asian importers were also hit
Asia is also vulnerable to supply disruptions.
Invesco estimates that about 58% of India’s LNG imports come from the Middle East, which accounts for about 2% of its primary energy consumption. About 27% of Singapore’s LNG imports come from the region, making up 2.2% of primary energy consumption.
Other Asia-Pacific nations source more than 37% of their LNG from the Middle East, Invesco said, representing almost 3% of primary energy consumption, while 26.6% of China’s LNG imports come from there.
Elias Haddad, global head of market strategy at BBH, said countries heavily dependent on imported oil and gas with limited economic space – including Japan, India, South Africa, Turkey, Hungary and Malaysia – are the most vulnerable to energy disruption shocks, while Norway, Canada and Mexico are the least exposed.
“A protracted conflict that further disrupts energy production and shipping could raise the risk of a recession and increase economic stress,” Haddad said in a note.
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