Liquefied natural gas prices are soaring overseas, creating a problem for Europe but a potential bonanza for exporters including Venture Global, Woodside Energy, Shell, Chevron, and Cheniere Energy.
Even as global oil prices have moderated because more supplies are getting through the Strait of Hormuz, liquefied natural gas, or LNG, remains in short supply. Oil is trading around the same level where it was a week after the Iran war began, but LNG prices have continued to rise.
In both Europe and Asia, benchmark natural gas prices have more than tripled this year. (U.S. consumers have been largely shielded from these overseas price spikes, because the U.S. is the world's largest producer of natural gas. European prices are more than eight times as high as U.S. prices.)
The Iran war has had a particularly big impact on LNG supply, which mostly comes from three places -- the U.S., Australia, and Qatar. Qatar's export terminals sustained severe damage in the war, and the rest of its supply has struggled to get through the Strait of Hormuz.
The ramifications are bad for both households and companies in importing countries. Natural gas is a key energy source for heating, electricity, and making products like metals.
Europe is in a particular pickle. Its consumption of natural gas doubles in winter as consumers use more to heat their homes. And Europe relies more on the spot LNG market than Asian countries, which get more of their supply under long-term contracts that limit price volatility.
European wholesale electricity prices have lately been soaring, with German spot prices up 40% in a month and 150% versus a year ago. Higher energy costs could feed through to broader inflation.
European industrial users of natural gas are also cutting back on how much they use, a warning sign for Europe's economy. A steel industry trade group in Italy said this week that the country's steelmakers have stopped or slowed production because of high gas and electricity prices.
"It is concerning," said Balaji Krishnamurthy, who leads Chevron's operations in Australia, a major hub for the LNG market. Chevron's Australian LNG terminals send millions of tons of the product to Asia, accounting for 6.5% of the global market. Chevron and others are working on expansion projects to boost LNG production, but most expansion projects take years to complete. "Europe is competing with Asia for spot market energy in a constrained environment," he said. "That's what is driving up the current prices."
Demand for LNG from some countries in Asia has slipped a bit this year as countries there rely more on coal to blunt the price impact, Krishnamurthy said. But he expects demand to rise again as LNG prices come down.
The European Union's natural gas storage facilities are only 72% full now, their lowest level for this time of year since 2013, and countries are pulling gas from storage at the fastest rate in years, experts said.
"They're definitely playing it close to the edge, because the amount that they're drawing on storage right now is immense," said Ira Joseph, a natural gas expert at the Center on Global Energy Policy at Columbia University. "If you're an end user in Europe, it's definitely disconcerting."
One reason Europe has been using so much natural gas is because other sources of electricity have been underperforming. Some nuclear plants in France reduced output earlier this year because drought and high river temperatures constrained cooling, forcing countries to rely more on natural gas. Renewable energy has been shouldering more of the load, but has at times underperformed too.
A warmer-than-normal winter could offer Europe a reprieve from high prices by reducing demand for gas for heating. But Venture Global, one of the top U.S. exporters of natural gas, told investors this week that so far LNG demand shows few signs of slackening. Europe relies on wind for about 20% of its electricity generation and forecasts call for uneven wind generation, the company said. In Asia, heavy coal use has also led to coal prices rising, making gas more attractive. "If LNG volumes coming from the Middle East remain limited, we expect LNG prices to remain volatile this winter and potentially move higher from currently elevated levels," said CEO Mike Sabel.
Europe has been trying to wean itself off of gas imports by building renewables and other sources like nuclear power plants. Asia is also ramping up spending on assets like solar panels as countries try to insulate themselves from natural gas price spikes. That's raised fears among analysts that a natural gas glut is coming, and prices could plunge. But that hasn't stopped the buildout of LNG export terminals. Several companies are betting that demand for LNG in both Europe and Asia will stay strong. Australia-based Woodside Energy is building a large new LNG export terminal in Louisiana that could nearly double its current capacity. While Woodside's Australian assets export to Asia, the Louisiana hub is expected to mostly direct its cargoes to Europe.
In an interview with Barron's this week, Woodside CEO Liz Westcott said the company is not seeing a slowdown from customers. "Today, customers are still contracting. If they truly believed there was going to be a big glut of LNG, people would be sitting on their hands waiting for that," she said.
Even as customers diversify their energy sources, she sees an expanding role for gas. For instance, it can supplement renewable assets when the wind isn't blowing and the sun isn't shining.
"Our investments are for decades, and we look through that lens at the long-term macro," she said. "The long-term demand for energy remains very strong, and for LNG in particular."
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