Europe Gas Jumps 40%, Most Since March 2022, on LNG Strike Vote

(Bloomberg) -- European natural gas jumped above €40 for the first time since June amid the possibility of worker strikes in Australia — highlighting market jitters over potential supply disruptions.

Benchmark futures soared as much as 40%, the most since March 2022, building on gains in the previous two sessions. Traders are concerned about a long-lasting strike, with analysts at Citigroup Inc. predicting it could cause European and Asian LNG contracts for January to double. 

Workers at Chevron Corp. and Woodside Energy Group Ltd. facilities in Australia voted to strike, which has the potential to disrupt LNG exports from the country, tightening the global market for the fuel. The exact timing of the industrial action — if it goes ahead — wasn’t immediately clear. Laborers could stop with seven days’ notice as early as next week depending on progress at a meeting on Thursday, the Australian Financial Review reported.

Asian buyers “are likely to bid up LNG imports” to replace Australian volumes if there are disruptions, which would affect Europe as well, said Nick Campbell, a director at consultant Inspired Plc. “LNG has become a baseload supply in the European gas mix, therefore any signs that this flow is at risk leads to support in price.”

Other bullish drivers have contributed to moves in gas recently. They include a drop in LNG imports to Europe last month and increased flows from the region to Ukraine, which has spare storage capacity. Potential delays in Norway’s seasonal maintenance also pose a risk. 

It’s also possible that this week’s price surge caused a wave of position-covering by investors who previously bet on further declines in gas. Similar moves resulted in extreme volatility in June.  Investment funds’ net-short positions in benchmark Dutch gas futures increased last week — after falling to the lowest level since January a week before, according to data released Wednesday by market operator Intercontinental Exchange Inc. 

The surge signals there are still risks to gas supplies after last year’s crisis, even though the region’s inventories are unusually high for the season, providing some security that Europe is heading to the winter months in good shape. Industrial demand for gas remains depressed and sustained production cutbacks are one of the main reasons European gas prices have collapsed 50% this year.

“Significant demand destruction has been a key offset, but a narrowing global LNG pool leaves Europe exposed to price-competition for spare cargoes with Asia, particularly amid seasonally higher demand next winter,” Patricio Alvarez, an analyst at Bloomberg Intelligence said. 

LNG Risks

The vote by Woodside workers in Australia increases the risk of industrial action, which could disrupt LNG operations at its North West Shelf project, said Jake Horslen, a senior LNG analyst at Energy Aspects Ltd. in London. Japanese clients would be most affected by any strikes in Australia. 

“Asian buyers would need to pull more strongly on Atlantic LNG to balance any shortfalls in the event of a strike, which would tighten supply fundamentals in Europe and the Atlantic,” Horslen said. “This creates upside risk for TTF,” the European benchmark price.

Dutch front-month futures, Europe’s gas benchmark, traded  higher at € a megawatt-hour by 4:12 pm in Amsterdam. The UK equivalent added . 

US Henry Hub gas futures also surged on expectations of a possible uplift in demand. About 11% of US gas production is exported as LNG, according to the Energy Information Administration. Gas futures on the Nymex briefly surpassed $3.00 per MMBtu on Wednesday for the first time since early March, supported by persistent hot temperatures.

European winter gas contracts also gained, albeit at a lower pace, as German utility EON SE warned of more risks during the upcoming heating season. “The crisis is not over,” though the likelihood of a repeat of last year has diminished, Chief Executive Officer Leonhard Birnbaum said in an interview with Bloomberg Television. 

(Updates with potential long-term impact in second paragraph.)

©2023 Bloomberg L.P.