October 25, 2022 - 1:30pm

On Monday something peculiar happened in the European natural gas market: the spot price went negative. That is, traders were paying other traders to take contracts for gas deliveries off their hands. These contracts had apparently become worse than worthless: people were getting paid to get rid of them.

This is significant. In the United Kingdom, thanks to government intervention, the average household energy bill is capped at ÂŁ2500 per annum, which is 95% higher than it was this time last year. Yet if someone had entered the market for gas on Monday, a trader would have paid them to take gas off their hands.

At first glance, this doesn’t make sense, and when something looks so wrong in a market, it often means that bubble dynamics are afoot.

On the same day, The Wall Street Journal ran an article by Rochelle Toplensky with the headline ‘Is Another Gas Glut on the Horizon?’ The article seems to pick up on the market chatter that is driving European gas prices negative. Interestingly, this piece appears a lot less confident in the idea of a supposed European gas glut than the market action would suggest.

Toplensky notes two indicators that market mavens seem to think indicate a looming gas glut. First, they note that there are a lot of ships carrying Liquefied Natural Gas (LNG) which are sitting off the coast of Europe. The article does not provide any relative numbers, and financial commentators have failed to produce them too. This is strange because large, confident market moves are usually backed by convincing charts or data analyses.

Additionally, it is not clear that long lines of ships holding LNG off the coast is a good thing for the European gas market. Energy market analysts have pointed out that, even if sufficient LNG could be sourced globally and shipped to Europe, the continent may not have the capacity to process it in a timely manner. It seems more likely that the queue of ships off the coast of Europe is reflective of the lack of capacity there is to process the LNG on board.

The second indicator that Toplensky notes is that, because of strong demand for LNG, the industry is sure to see an influx of investment into liquefaction infrastructure. To back this up, they show forecasts from a consulting firm called Rystad Energy. The forecasts themselves show increasing liquefaction capacity moving out to 2030. But this is just a forecast: even if it is correct, this new capacity is not going to come online this winter when Europe needs it most.

The markets apparently think that natural gas prices deserve to be negative because there are some ships carrying LNG off the coast of Europe. Is this convincing? No. Is this a massive bubble based on irrational expectations? Almost certainly.

This is a particularly dangerous bubble, too. Our political and business leaders have been worryingly complacent about the energy crisis coming our way. Clearly, they are not worried about the prospect of rationing to maintain energy supplies through the whole winter. After all, those ships off the coast are bound to land any day now. With no rationing and a blasé attitude toward the crisis, it will fester. At some point, if the rosy speculations prove wrong, we may wake up to realise that we have burned through our gas reserves before the end of winter. On top of this, there may be no more coming.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics