The worldwide spike in natural gas, coal and power prices has put Europe and China at risk of industrial shutdowns. While the situation seems to have surprised the market, it’s been more than nine months in the making. Here’s a look at the factors behind the surge and what could happen next.
How did we get here?
It began with the cold winter in Asia and Europe last year. The weather drained gas inventories to very low levels across the globe. Countries typically rebuild their inventories during the spring shoulder season, but couldn’t this year because of the following reasons:
- Lack of spare capacity in the liquid natural gas (LNG) market. Low gas prices over recent years and fears of LNG oversupply has stifled investment in new natural gas supplies. As a result, LNG facilities are managed to meet existing contracts and have little capacity to respond to supply constraints.
- Tighter supply flow from Russia. Russia has reduced its natural gas exports, a move it blamed on a processing plant outage and lower Russian production. However, some have speculated that Russia may be trying to pressure Germany into approving the Nord Stream 2 gas pipeline. The pipeline would run from Russia to Germany via the Baltic Sea.
- Disappointing gas production in Europe. Investment in the North Sea has been very low over the past decade, leading to lower local offshore production in the region. Meanwhile, the giant Groningen gas field in the Netherlands is slowly being shut down due to earthquakes.