Supply Risks and Volatility in the European Natural Gas Market

Supply risks plague the natural gas market

The European natural gas market has behaved in a volatile manner over the summer. This was sparked by prolonged maintenance in Norway, significantly reducing gas flows into Europe. In fact, further maintenance in Norway again saw gas flows declining more recently. There's also been concern over Australian LNG supplies, with workers threatening to go on strike. Potential strike action would have put supply at three facilities at risk, which make up around 10% of global LNG supply.

These LNG supply risks have eased somewhat with unions and the Woodside company coming to an agreement for workers at the North West Shelf facility. However, negotiations are still ongoing at two other facilities operated by Chevron. These have a combined capacity of 24.5mtpa, around 6% of global supply. This is clearly still a risk to the market, particularly if we see a prolonged strike that would affect all of this capacity and if it runs deep into the Northern Hemisphere winter.

Australia is not typically a supplier of LNG to Europe. However, reduced LNG supply would mean that Asian buyers would look elsewhere for alternative supply, increasing competition with European buyers. This is an upside risk to European gas prices, particularly if it were to occur over the heating season. European gas inventories naturally decline over the winter, with demand basically doubling over these months. If the LNG supply, which Europe is more reliant on now, is also reduced, inventories would fall quicker through winter.

That said, Europe is in a comfortable situation in the near term. Despite Norwegian disruptions, storage has filled up at a good pace and is, in fact, 92% full already. This is above the 79% seen at the same stage last year. It also means that the EU has hit the Commission’s target of having 90% storage by 1 November, more than two months before the target date. We believe that Europe will go into the 2023/24 winter with storage basically at 100%. This suggests that in the short term, we will need to see European gas prices weaken and trade at a discount to Asian LNG. This is to ensure that LNG flows are diverted from Europe. Only when Europe starts drawing down storage during the heating season will we see further upside for prices.