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Natural Gas Crisis Closely Following Its Crude Oil Counterpart

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Natural Gas Crisis Closely Following Its Crude Oil Counterpart

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Following the crisis in the oil markets, closely behind it, is the crisis on the natural gas market.

And it risks closely repeating the scenario of what crude oil went through (and is still going through).

Demand is constantly falling, and gas storages are filling up.

According to the Gas Infrastructure Europe trading group, European storages are 66% full, while over the last five years the storage was only 38% full on average. Gazprom is responsible for a fair bit of natural gas imports into Europe.

The leading global LNG exporter is Qatar. The state-owned company Qatar Petroleum, after a collapse in demand in Asia, rerouted most of its supplies towards Europe, having booked all import capacities at the Belgian terminal in Zeebrug until 2044.

Today, Qatar faces the same dilemma as Saudi Arabia. To reduce production or try to expand its market share through dumping, which can lead to gas prices with negative values (similarly to what happened with WTI).

Essentially, Qatar is at an impasse, it has no choice. Any attempt to begin dumping would lead to the same scenario that was observed with Saudi Arabia – it will be seen as some sort of defiance, and then, similarly to Riyadh will bend and begin cutting production in massive amounts.

If prices collapse, similarly to what happened with oil – the US shale industry would be the most affected.

Pipeline gas from Russia is much more competitive than LNG (liquefied natural gas) due to the peculiarities of liquefaction technology and transport losses.

owever, Qatar has an advantage over LNG producers such as the United States; the Ras Laffan plant is one of the three lowest cost in the world.

However, falling gas prices have already put Qatar at breakeven. This year, prices fell to $2 per million btu (British thermal unit), and in the 3rd quarter of 2018 gas cost more than $10 per million btu.

Qatar’s import schedules show that shipments to northwestern Europe will no longer grow. 17 LNG tankers (more than usual at this time of year) are idle off the coast of the country.

In practice, there is no doubt that Qatar’s next step will be to reduce production.

There is one difference from the oil market, however: there is no OPEC, and as such there can be no coordinated actions that’s been demonstrated by the OPEC+ members in recent weeks.

As such, this could potentially lead to the forming of an organization of gas exporting countries, as even Bloomberg has outlined in one of its articles on the topic.

This, on the other hand, isn’t exactly according to Washington’s plans.

On one side, Washington is interested in reducing production, which will inevitably require the creation of a “gas OPEC.”

From another direction, the consolidation of gas exporting countries has always been perceived by the United States as a threat to national interests.

The fact is that the creation of an organization of gas exporters and the consolidation of the world market radically changes the situation.

If Saudi Arabia plays the key role in the oil world, since it’s the biggest exporter on a global scale, the gas landscape is much different.

Here, Iran and Russia (as Moscow has the largest gas reserves) are much more central players than in the oil world – and neither is partnering with the US.

Qatar is sure to have some influence, but limited. And without control of the spot market, it is impossible to provide exchange control over pricing, as it is designed in the oil market.

The US long-term energy strategy aims to create an independent gas market, separating it from the oil market, but preserving all the deals in dollars.

This will allow Wall Street to fill the financial bubble with real assets. There are more gas reserves on the planet than oil reserves, and potentially the gas market is more capacious.

The main thing is that “paper gas” (futures and derivatives) are traded on the New York Stock Exchange.

This is impossible to take place, since Iran and Russia are key players, the current political situation in both countries, according to the US entirely disallows that.

And it is no accident that whenever the idea of creating a “gas OPEC” is floated, the US reacts strongly to it. The latest such reaction was expressed in a statement by a group of congressmen that the creation of a single operator of the gas commodity market would be regarded by the United States as a declaration of war.

The current situation the US finds itself in is that it needs to sacrifice something, and there is no situation which provides a complete “victory.”

At the same time, the timeline is becoming ever shorter, since the Nord Stream 2 is soon to be complete and start pumping gas, and as a result Russia’s influence would also increase, since it would take a bigger piece of the EU market.

The Akademik Cherskiy vessel is close to the final location, the materials, needed for the completion of the Nord Stream 2 pipeline are there, and it is simply a matter of time.

Natural Gas Crisis Closely Following Its Crude Oil Counterpart

Click to see full-size image

Natural Gas Crisis Closely Following Its Crude Oil Counterpart

Click to see full-size image

Natural Gas Crisis Closely Following Its Crude Oil Counterpart

Click to see full-size image

 

The completion of the pipeline, in addition to Turk Stream and also the Power of Siberia to China threatens to further increase tensions, since the US would be even less inclined to condone the forming of a “gas OPEC” if it cannot play an even remotely leading role.

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