…Brent Crude reached $79 per barrel
Dutch TTF and UK NBP natural gas prices hit all-time settlement highs on Monday—up 11% as the front-month contract is set to soon expire and the European gas crisis worsens.
The front-month (October) contract TTFV1 was up by €6.635€ MWh on Monday afternoon, to €76.875, pushed higher in part by the contract rolling off this week.
Prices often spike as the contract comes to a close.
The UK’s NBP virtual trading hub for natural gas also hit a record-high price, with front-month contracts reaching an all-time high on Monday afternoon.
The surge in natural gas prices is also due to a massive supply shortage in Europe, a situation that is quickly spilling over into other countries and other markets—including the coal and oil markets as demand for power exceeds supply.
The natural gas crisis is set to intensify as winter heating season approaches, with supplies insufficient to keep up with current demand, let alone build stockpiles for what will be increased demand in the cold season.
Europe’s natural gas crisis has prompted European fertilizer producers to curb output, which could send food prices soaring along with the natural gas prices. It has also sparked warnings of blackouts and factory shutdowns.
If the winter is colder than normal, natural gas supplies could run even shorter, leaving Europeans and possibly other countries, especially those that can barely afford current energy prices, in the cold.
Prices may continue higher tomorrow given the timing of the contract expiration. But according to EBW analysts, warmer October weather may allow natural gas to catch its breath, pressuring gas prices later this week.
Just ahead of the winter season, Europe’s natural gas crunch created a snowball effect in global energy markets. What started as very low gas inventories in Europe during the summer is now spilling over into oil, natural gas, and coal prices all over the world, with no quick fix or signs of a major short-term correction in sight
Brent Crude prices topped $79 per barrel early on Monday – the highest level in three years. Prices are now headed for $80 – a level which some analysts had forecast in the summer, but which not many market participants believed would happen because of the Delta variant depressing prices and demand in some parts of the world in July and August.
However, as the winter heating season in the northern hemisphere approaches, gas and power prices in Europe are surging, driving up coal demand and prices in Europe and globally as more coal is used in the power sector. At the same time, economies are rebounding from last year’s COVID-inflicted slump, with energy-intensive industries growing. But as demand rises, supply stays muted due to underinvestment in new energy supply in the past 18 months, the OPEC+ cuts, and weather-related outages such as Hurricane Ida at the end of August, which constrained U.S. Gulf of Mexico oil and gas supply throughout September.
Because the supply of oil, gas, and coal is struggling to catch up with recovering demand, energy prices are rallying around the world.
Consumers and industries in Europe have already started to feel the pinch from record gas and power prices. Industries across Europe are scaling back operations due to record natural gas and power prices, threatening to deal a blow to the post-COVID recovery. Utilities are firing up more coal-powered electricity generation, pushing demand for coal higher, despite the record carbon prices in Europe and the European Union’s pledges to be a net-zero bloc by 2050.
European coal prices have hit a 13-year high as coal supply to Europe remains constrained and utilities fire up more coal power plants amid surging natural gas prices.
The rally in natural gas prices is also spurring on global demand for coal. China and India are replenishing low stocks of coal, driving coal prices in Asia to records.
Goldman Sachs has recently nearly doubled its price projection for coal prices in Asia, expecting the benchmark Newcastle thermal coal to average $190 a ton in the fourth quarter, up from a previous forecast of $100 per ton, due to sky-high gas prices ahead of the winter heating season.
In China, a power supply crunch may be looming amid soaring coal and gas prices and electricity demand. Chinese authorities are ordering some factories in the heavy industries to curtail operations or shut down to avoid a power supply crisis, Bloomberg reports.
The gas and coal price spikes globally are set to raise demand for crude oil in the winter as a substitute fuel, analysts and OPEC itself say. A gas-to-oil switch and continued recovery in global oil demand have analysts and major oil trading houses predicting that oil will hit $80 and even $90 this winter – and potentially $100 a barrel at the end of 2022.
“Broader concern over tightness in energy markets, particularly for natural gas, is spilling over into the oil market. The Asian LNG market is trading at an equivalent of over US$150/bbl, while European gas prices are not too far off an equivalent of US$140/bbl. These higher gas prices will lead to some gas to oil switching, which would be supportive of oil demand,” ING strategists Warren Patterson and Wenyu Yao said early on Monday.
Oil price hitting $80 a barrel, however, would be a pain point for many crude importers, including large Asian customers such as China and India.
If the current price strength continues, the OPEC+ monthly meeting on October 4 could see the alliance easing the cuts for November by more than the 400,000-bpd supply increase each month, ING noted.