The rising tide: how the world’s markets must grapple with high energy costs
ICIS Energy Series: Focus on gas and LNG, September 2022
The cost of energy is rising globally at unprecedented rates. Following the downturn of the economy at the start of the pandemic, an uneven economic rebound has lifted demand in major markets, particularly from powerhouse countries such as China that consume and export goods on a global scale.
This vortex of price drivers was then accelerated and lifted higher with the invasion of Ukraine in February 2022, amplifying Europe’s squeeze for energy supplies following gas supply disruptions from Russia. This has sent gas, power and LNG prices skyrocketing to record-high levels amid extreme volatility.
This is the case with the liquefied natural gas (LNG) market, which previously enjoyed a period of surplus and growth from the mid- 2010s on the back of global investment and, in particular, abundant shale oil and gas development in the US.
This natural gas supply boom led to a race to build new LNG export plants from the US Gulf, a region that also attracted billions of dollars of investment in petrochemical manufacturing, as a result of the competitive gas supply. US LNG export projects began operations starting in 2016, just as other LNG export projects started up globally, especially in Australia.
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A continued change of pace
"The rapid gasification of Asian markets in recent years, and which is expected to continue in the medium-term, has had global implications. Coupled with a rise in spot LNG trade, gas markets worldwide are now more intrinsically linked. In essence we are witnessing the globalisation of gas."
Tom Marzec-Manser, Head of Gas Analytics, ICIS
However, the wave of new LNG production, which contributed to the depression of record low global prices in 2020, has come to an end.
The global profile of natural gas in consumption has also changed, as countries have added more renewable energy generation capacity. The market share for natural gas, in many countries, has waned, as the share of renewables has increased, such as in the US, Brazil and Europe.
But gas demand has risen quickly elsewhere, especially in China and India, and in other emerging economies in south and southeast Asia. As many imports are directed towards China, which holds 60% of the demand currently, it is expected to supersede Japan, as the largest LNG importer this year.
Asian LNG consumers have become increasingly more aware of European global gas benchmark, the ICIS TTF, the most liquidly traded reference point in Europe, as companies look to diversify their supply portfolios. The result is that global gas markets are becoming more interconnected as regional prices have a continued and reciprocal effect on each other.
While LNG markets were already in transition, the pandemic accelerated these changes.
Coronavirus lockdowns and damaged economies led to a large drop in global energy demand and oil price crash in 2020. But in the following months, economic revival, led by China, tighter LNG fundamentals and a colder-than-expected winter depleted gas stocks in Europe and Asia. This set the tone for a supply crunch that has extended through 2021.
The rise and rise of ICIS TTF
“Road, rail and waterway closures not only constrain shipments of finished product, but they also strand essential workers and cut off access to raw materials needed to feed those operations.
Equipment that suffer damages from high winds, floods and other weather-related events could further postpone repairs if specialised parts must be fabricated and if logistics bottlenecks delays the delivery of those parts.”
Tracy Dang, Managing Editor - The Americas, ICIS
The rising ICIS TTF gas price in Europe has had more of an influence than ever on Asian spot LNG prices, with the ICIS TTF automatically set as the floor price for many markets.
The knock-on impact of high energy prices has had rippling effects in downstream markets. Major consumers of natural gas, besides residential heating and power, also include fertilizer producers, methanol producers and industrial users of high-heat manufacturing.
So, this has affected heating bills for residential customers worldwide, as well as commodity purchasing managers across major industries along the natural gas value chain.
As most purchasing managers will look at input factors, such as costs for raw commodities, the unprecedented escalation in natural gas price this year has made it more difficult for businesses to cope with these soaring, and unpredictable, underlying prices.
“There has been a wave of shutdowns at fertilizer plants in Europe because of the surge in natural gas prices. The supply situation in Europe will get worse and buyers will have no option but to depend on imports of ammonia, urea and nitrates to make up for the shortfall. We are already seeing urea flowing into Europe from new markets such as Nigeria and the US. This demand will keep nitrogen prices firm as Europe continues to struggle with availability and absorbs supply from other markets. If there are bankruptcies and permanent shutdowns there will be a longer-term bull impact on fertilizer prices globally,” Deepika Thapliyal, deputy managing editor of fertilizers at ICIS.
This is expected to have knock-on impacts elsewhere, as farmers in the continent of Africa and countries such as Sri Lanka and Nepal have already struggled with fertilizer shortages.
In the long term, the future of Europe’s fertilizer products will be in question, particularly as cheaper imports replace Europe’s domestic production.
In addition, steel producers must contend with soaring electricity prices, in Europe in particular. The correlation between the continent’s fuel-switching economics, and carbon allowances, also means that the long-term power generation mix and the outlook for emissions have become ever more connected.
Ceramics producers in China have also become vulnerable to top-down industrial demand curtailments during the peak of commodity prices.
These users are now all exposed to these skyrocketing prices. This is likely to have repercussions that will last long after the winter peak of pricing.
Many end-users, particularly in the US and Europe, may have hedges, or financial products that limit or reduce commodity price risk, in place for gas or energy supply but the unprecedented price shock has likely strained measures.
While this may help smooth the volatility of these markets, hedging instruments expire and a volatile commodity price underscores the vulnerability of an end-user.
Whether the end-user could be in manufacturing, industrial or tech, energy costs are expected to cascade down to raw commodity costs.
Adding to the disarray, supply chain disruptions have also become prolific along the value chain, from shipping bottlenecks, rail and trucking logistics and end-user receiver issues.
Expert Q&A - Interview with Ruth Liao, ICIS LNG Americas Editor on Global LNG:
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Expert Q&A - Interview with Ruth Liao, ICIS LNG Americas Editor on Global LNG:
Environmental implications
"Companies are overhauling their brands, with new names such as TotalEnergies and Qatar Energy."
Ruth Liao, Americas Editor, LNG, ICIS
Extremely high gas costs and limited supply have brought issues of the broader energy transition into focus but the short term needs for energy make the journey toward climate transition difficult.
In some countries, such as Europe, renewable energy generation is struggling in 2021, with coal stepping in to fill the supply gap.
It has also directed China’s path away from coal to gas, with demand jumping for both. From portfolio integrated energy companies to major state-owned producers, the transition towards decarbonisation has never been more pronounced but the goalposts of meeting carbon targets such as those set during COP21 may be more removed given the imminent need for all energy forms in Europe.
Future outlook
What are the expectations for medium and short-term impact?
This extended rally of energy prices is disrupting how mid and longterm price outlooks will be formed.
The future appears uncertain and unpredictable given the price shocks driven by Russia’s agenda, Europe’s soaring energy needs and the unabated volatility of markets.
Near-term closures of downstream users such as fertilizers, ammonia and chemical producers may continue to ripple across the globe.
In the meantime, the continued globalisation of LNG, on the back of rising ICIS TTF prices into Europe, means that global gas economies are truly contributing to more connected markets and an increasingly interconnected global trade.
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