Supply Disruptions and War Premium Priced in LNG

Liquefied Natural Gas (LNG) is once again in the spotlight after several developments over the past two weeks have intensified competition between the European Union and Asia for existing supplies. This has driven the price of Dutch TTF Natural Gas Futures up over 32% in the last three months. From production issues to the termination of Russian contracts, the demand for LNG throughout the summer and fall may have more tailwinds than expected.

One of the biggest suppliers of LNG to the Asia-Pacific markets is Chevron Australia. Their Wheatstone platform is currently under repair, which has disrupted LNG supplies and driven up prices in the Asia-Pacific region. This disruption has also caused existing supplies to be diverted to the highest bidder, moving away from Europe to Asia, where there is approximately a $3.10 per MWh price difference. This diversion of supplies is impacting the gas storage refill season in Europe, which many believe should not be a huge concern at the moment. However, any further disruption in supplies could come at a hefty cost.

On Wednesday, Germany’s energy conglomerate Uniper officially terminated long-term Russian gas supply contracts following a long legal battle over Gazprom’s failure to deliver promised gas flows since the 2022 Russian invasion of Ukraine. This situation puts into question Russia’s willingness to continue supplying Europe with gas or if we will see another reduction in flows, once again putting a strain on supply and leading to increased prices. With geopolitical tensions ramping back up between NATO and Russia, concerns around energy flows have started to re-emerge, a scenario the European Central Bank would like to avoid at all costs after its marginal victory over inflation.

As Europe and Asia continue to vie for limited LNG supplies amidst production disruptions and geopolitical tensions, the market faces significant volatility. Chevron Australia's Wheatstone platform repairs and the termination of long-term Russian gas contracts by Germany’s Uniper have already caused substantial ripples in the supply chain. With the price of Dutch TTF Natural Gas Futures surging and the potential for further disruptions on the horizon, the demand for LNG is likely to remain robust.