Sanctioning Efforts Get Energy Hit --- With storage levels low, it won't take much for natural gas to swing wildly

"There is a global market for natural gas, but when supplies are as tight as they are today, technical problems can be painful local events.

Prices for the heating- and power-generation fuel have generally been moving in the same upward direction everywhere this year as storage levels remain depleted and as Europe's geopolitical tension with Russia, a crucial natural-gas exporter, escalates.

But on Tuesday, they went in dramatically opposite directions. The U.S. futures benchmark, the Henry Hub, plunged more than 15% to $7.28 per million British thermal units, while the Dutch TTF benchmark surged 16% to nearly $30 per MMBtu.

Two things came together on Tuesday: Freeport LNG, which liquefies and exports natural gas from Quintana Island, Texas, said its facility won't resume full operations until late 2022 after a fire that broke out last week. Even partial operations won't start for at least three months, which surprised observers since the company previously telegraphed that the facility would remain shut down for at least three weeks. That takes out about 18% of total U.S. liquefied natural-gas export capacity. Lower exports mean more natural gas gets to stay at home, possibly allowing more to be stored up for the winter.

It also means less gas for Europe, though. Exacerbating that issue, Russia's Gazprom said Tuesday that Nord Stream, the pipeline that transports Russian natural gas to Germany, is running at reduced capacity. Gazprom blamed Germany's Siemens for failing to return gas compressor units in time after repairs. Whatever the reason, the pipeline is able to supply only 100 million cubic meters of gas a day, or 3.53 billion cubic feet -- about 60% of total planned supply.

The price reaction might look overdone given that the outage at Freeport LNG is a drop in the ocean, compared with the amount of natural gas the U.S. produces every day -- about 2%. One way to interpret the wild swing is that the existing price rally was probably more about geopolitical skittishness than about fundamentals.

The 2% figure also understates its importance at the margin. Freeport LNG has capacity to liquefy and export 2.1 billion cubic feet a day, which is about 15% of the volume that the U.S. added to its natural-gas storage the week before the fire broke out. Using a back-of-the-envelope calculation, if the U.S. added natural gas to storage at the same rate it did in 2021, then it was on track to end up a hair below the five-year range ahead of winter heating season, when shortages can cause price jumps. Adding 2.1 cubic feet per day of natural gas over the next 90 days would take it comfortably within that five-year range.

The latest development is salt in the wound for Europe, where soaring energy prices are leading some factories to shut down. Meanwhile, given the relief U.S. factories could see after the drop in natural-gas prices following Freeport LNG's outage, the incident could be fodder for U.S. industrials to lobby for reduced LNG exports, as they did last year.

The Industrial Energy Consumers of America, an industry group of manufacturers, released a statement on Tuesday saying the drop in natural-gas prices following the Freeport LNG development "demonstrates the clear connection between LNG exports and the inflationary impacts to domestic prices for natural gas and electricity."

There could be geopolitical consequences, too. The U.S. and Europe have kept up a united front on energy policy so far, with the U.S. touting its ability to send LNG cargoes to Europe.

The sudden price relief for one party and financial strain for the other increases the risk that policy, not just prices, end up diverging, too." [1]

1. Sanctioning Efforts Get Energy Hit --- With storage levels low, it won't take much for natural gas to swing wildly
Lee, Jinjoo. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 16 June 2022: B.12.