Is there a bubble in the European gas market?
Rumours of an energy glut are greatly exaggerated
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 £2500 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.
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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.
Negative prices always make big news, but they are usually a temporary result of a large investor getting stuck with expiring futures contracts. Futures expire on the 3rd Friday of the month, which was last Friday. Weird price movements on Friday and Monday should be expected, as gas suppliers, consumers, and speculators all transition to Nov delivery dates. They don’t mean anything; it’s random, financial derivative, noise.
Trading will cease at the close of business two UK Business Days prior to the first calendar day of the delivery month, quarter, season, or calendar.
Philip, is that the standard futures expiration calendar for Europe? Pretty much all US options and futures expire on the 3rd Friday.
Unherd needs to find someone who understands the gas market if it wants to enlighten its readers.
Snide remarks illuminate nothing. Differences in opinion are what make markets. Even so, Mr. Pilkington’s argument is fairly simple and hard to counter in general terms. Negative prices in gas markets are unusual, because storage is typically possible, but not unknown. They may arise as a consequence of the unwinding of futures contracts and other derivatives, especially close to terminal dates. Hence, they should not be regarded as a reliable indicator of the market-clearing price for gas over a longer period.
Gas storage may be full but in a normal winter Europe consumes an amount equal to main pipeline capacity (before Nord Stream 2) plus drawdowns from storage. Supply this winter will be well below that level and no feasible amount of LNG deliveries will change the situation before next spring.
There has been an enormous amount of speculative interest in both electricity and gas markets over the last 6-8 months. Sharp upward and downward price movements may have been the result of such interest. At the moment the outturn for the next 6 months is highly uncertain, largely because it will depend so much on weather conditions as well as the impact of high expected prices on economic activity. That is, I believe, Mr. Pilkington’s point along with a warning not to attach too much weight to ephemeral spikes and troughs in spot market prices.
Yes, but in evaluating the quality of his response, one needs to factor in his perennial and well-known bias. Any positive news, no matter how small or transient, is bad news for Philip and his project fear agenda.
”Apr 26, 2020The investing world was gobsmacked and eyes glued to CNBC when oil futures went negative last week. If you missed it the first time, don’t worry it could happen again. Oil storage around…’‘
Well two years later they were $130 a barrel. All it took was Biden-nomics. And you guys had Boris to destroy the entire economy – and now his ex-checker who oversaw it – is in charge. Remember Truss-nomics?
What you have is first day of Sunak-nomics, haha – you have the fox in charge of the henhouse with that guy in charge….
You mad Brits let Biden lead you to sanction Russia who supplies your Vital resources – and give their enemies high-tech weapons,
This is again – just a storage issue and processing issue, and Futures, and likely Derivatives and Margin Calls. Germany shut its metal smelters because it could not make metal with the energy prices – so they buy the metal they used to make, from China – who did not sanction Russia so still get affordable energy. You sure showed them. Gas prices will be back…..
I couldn’t agree with your comments more, so why the big noise about US prices recently going negative, temporarily? Crude was negative in spring 2020, and gas.
Anyway since persons unknown blew up the Baltic pipes the best Europe can hope for is buying,,,Russian LNG, but our pols would rather we freeze in the dark.
Numbers have been provided in a CNBC report. ,Around 10 PC of LNG tankers are on hold on the high seas, leading to a shortage of available tankers and a very rapid rise in day rates.
What does the gas that will apparently be removed from storage be replaced by, a vacuum? These aren’t the old gasometers they are generally underground caverns use for pipe pressure stabilization so what is Herr Scholz propose to put in there, regasified America gas? Compressed air? I don’t think so, they’ve been using it as it’s entering the Euro market and relying on the tiny amounts coming from Turkey and the one Ukraine pipe still working. We’ll be in the dark before December, or the factories will have to close.
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