You are currently viewing Negative gas prices and drifting methane tankers: the graph that explains the enormous bottleneck that LNG is causing

The volume of Liquefied Natural Gas (LNG) in transit through all the oceans reaches historic levels, given the emergency situation that the EU is experiencing due to the threat of a total cut in Russian gas supply. But European storage infrastructures are finding it difficult to absorb so many imports from the US. This situation is causing a sharp cut in the price of gas, to the point that during the week in some spot markets there have been negative prices. But the experts and numbers don’t lie, there is not enough LNG production to cover Europe’s dependence on Russian gas, this and next summer.

The price paid for gas has gone, in a few months, from paying 300 euros in cash per MWh, equivalent to paying $250 a barrel of oil, according to the International Energy Agency (IEA), to directly collapse prices. In Europe, the prices came to quote in negative and, also, in some markets of the USA. In other words, there were operators who paid others to get rid of the contracts.

Such madness is hard to explain, considering that we came from a scenario where Europe was going to face supply shortages in the face of the Russian threat. Simplifying, the sudden drop is explained by the fact that there is not enough storage capacity for all the imported LNG that arrives at deposits in Europe. The region has practically doubled its imports, mainly from the US, to reach 60,000 cubic meters of gas, in the face of the threat from Russia. There is a graph that is quite illustrative of the current situation. Right now there are almost five million tons of liquefied gas in transit, mainly across the Atlantic, a historic figure, according to the Bloomberg LNG transport index, which collects shipments made around the world for at least the last 20 days. and has not yet reached its destination.

Around these dates there is always a rebound in shipments, as can be seen in the graphs, but this year they have exceeded any forecast. To put the figure for LNG in circulation into context, it must be taken into account that the average for recent years is 1.6 tons. The five million may fall short in the coming weeks. As winter approaches, orders have been piling up.

Enagás, the semi-public company in charge of managing the gas system in Spain and the warehouses, raised alarm bells a couple of weeks ago. “Sustained episodes of very high occupancy levels are being recorded in the tanks of all the LNG regasification plants in the system, which is expected to continue until at least the first week of November,” he explained in a release. The storage capacity was at 93%, which was and is causing little room to receive new loads that are not scheduled.

The consequence has been huge methane tankers adrift off the Spanish coast. There are several theories to explain these strange circumstances, but the main, and most widespread, is that the good weather has taken the market by surprise. The current demand at this temperature is not enough to release liquid gas storage and treatment infrastructure.

The five million tonnes of gas have highlighted the shortfall in the EU’s capacity to manage the entire LNG inflow, especially when gas reserves are already around 94%based on inventory data from Gas Infrastructure Europe. It is not only a problem of storage and regasification, but also of network connection within the European territory. Spain is the country with the largest reserve and regasification capacity in the region. Currently, the country has 48% of the LNG reserves of the entire EU and the greater capacity to convert the liquid into gas, but the problem is the connections with the rest of the countries, which do not exist, hence the importance of the Midcat or other alternative infrastructure.

If Europe’s gas and LNG power has problems with excess supplies, the situation should not be better in other European countries. According to data from Vessel Finder, more than 80 methane tankers are heading to unload at deposits in Northern Europe, which represents a traffic greater than 20% compared to last month.

Another theory that is prevailing is that producers and traders have failed in their forecasts and prefer to keep LNG carriers waiting for prices to rise, or at least that is what shipping companies like Fearnleys slip. This week’s gas market developments collide with the reality of Russia’s threat of a total supply cutoff, triggering a biblical-type energy crisis.

Despite the drop in gas prices, European efforts to replace Russian supply are still insufficient. For example, Germany’s gas reservesthe country that is at the epicenter of the crisis, are close to 98%, but they only guarantee two months of supplies for the entire country. Should there finally be a harsh winter and a Russian supply cut, there will be no needed stocks, Bruegel analysts noted. Hence the importance that LNG imports are having.

“Europe is now in a comfortable place with regard to supplies,” says Graham Freedman, an analyst at consultancy Wood Mackenzie. “The risks of blackouts and rationing are receding now, but the real test will be when we have cold weather,” says the expert. No expert dares to say that the crisis is over, because Europe is experiencing a mirage due to the high imports of liquefied gas. The International Energy Agency has warned, just today, that imported LNG will not be enough if the Russian gas supply is completely cut off. “EU reserves would fall by less than 20%, assuming a high level of supply, and close to 5%, if there is a low level of importsAnd he warns: “Storage falling to these levels would increase the risk of supply disruptions in the event of a late cold snap.”

The only solution is to cut consumption

The IEA states that the EU will continue to face cuts in internal supplies, if there are no cuts in demand. In its fourth quarter report, it acknowledges that European countries are reducing demand. “Gas consumption in Europe fell by more than 10% in the first eight months of this year compared to the same period in 2021, driven by a 15% drop in the industrial sector as factories cut output. The self-commitment of the members of the EU was 15% to face the winter with guarantees “A reduction in demand of 13% during the winter period would be necessary to maintain storage levels above 33% in the case of low LNG inputs”, they calculate from the agency.

The underlying problem is that the LNG production capacity is limited and it is a very sensitive market. Data from the BloombergNEF research service suggest that gas from the US represents 40% of Europe’s liquefied natural gas imports and “will only make up a fraction of Russia’s deficit next summer.” With supply cuts from Russia, once Europe’s main gas supplier, not occurring until the end of the summer storage campaign, the lack of flows will be even more apparent next year.

Adding to the lack of stockpiling capacity in the EU is the limited capacity of global LNG production, the IEA stresses market flexibility. “About 50% of the current world trade in LNG can be considered contractually flexible and therefore open to competition to determine its final destination,” the agency said. It means that just as LNG arrives in Europe because of the high prices it is paying, it can go to other parts of the world, if potential buyers pay more.

“US supply is particularly price sensitive and will flow to the better paying market, which will remain in Europe unless Asian demand picks up,” BNEF warns. The accounts of the research firm suggest that for the EU to have its demand covered, it must remain an attractive market for sellers and attract around 70% of world spot supplies, mainly from the US, “since growth of LNG production remains limited in the coming years. Many of the stranded ships do not respond to clients with long or medium-term contracts, if they do not follow routes to find the best prices.

The percentage of reserves for next summer will be a direct consequence of the amount of LNG that Europe can attract from global markets. According to the contracts accounted for by BNEF, more than 43% of the fuel can go anywhere, to the highest bidder. The fear is in China whether it will whet its appetite for energy next year.


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J. A. Allen

Author, blogger, freelance writer. Hater of spiders. Drinker of wine. Mother of hellions.

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