US fire highlights Europe's precarious gas position

Prices jump after fire shuts terminal resulting in at least 10 missed cargoes

Thu, 09 Jun, 2022 - 16:45

Europe’s natural gas prices have jumped after a fire at a large export terminal in the US wiped out deliveries to a market that is on high alert over tight Russian supplies.

Benchmark futures traded in Amsterdam in the Netherlands snapped a six-day falling streak, while UK prices soared up to39% before paring gains. The Freeport liquefied natural gas facility in Texas which makes up about a fifth of all US exports of the fuel will remain closed for at least three weeks, resulting in at least 10 missed cargoes.

The closure comes as pipeline supplies from Europe’s top providers are also capped. Key facilities in Norway are undergoing annual maintenance this week, while Russia’s supplies are below capacity after several European buyers were cut off for refusing to meet Moscow’s demands to be ultimately paid in rubles for its pipeline fuel.

“The event highlights Europe’s precarious situation and it would likely signal an end for now to the calm trading seen in recent weeks,” said Ole Hansen, head of commodity strategy at Saxo Bank. “An export halt during the high-demand winter months would have triggered a much bigger reaction.”

The extent of the damage to the Freeport facility is not yet clear, but the fire could potentially knock out about 16% of total US LNG export capacity “for an unknown period if the fire damage proves difficult to repair,” analysts at Evercore ISI said in a note.

“A worst-case scenario could add to the already tight European market,” said Fabian Ronningen, an analyst at Rystad Energy. But if the facility can open in three weeks, the impact will most likely be limited, he said.

The US sent nearly 75% of all its LNG to Europe in the first four months of this year, which helped to calm the market after the wild price swings in spring.

“In the last three months, 68% of all freeport cargoes were delivered into European markets,” said Tom Marzec-Manser, head of gas analytics at ICIS, citing his firm’s data.

“So traders in Europe will be eagerly watching and waiting to see if this outage ends up lasting longer than initially predicted by the operator.”

Strong gas-storage injections this year could help limit price gains, analysts at Inspired Energy said in a note. Europe’s underground facilities were about 50% full as of June 7 after active refilling in recent weeks, which moved the storage level closer to historic averages, data from Gas Infrastructure Europe show.

Dutch front-month gas, the European benchmark, rose as much as 16% before trading 7% higher at €85.15 per megawatt-hour in Amsterdam. The contract had dropped 16% over the previous six sessions.

The continent’s electricity prices also rose, with German contracts for next month adding as much as 11% to €194.50 per megawatt-hour before easing to €185.25.

Pipeline gas supplies to Europe from Norway rebounded after a one-day halt of the giant Troll field for annual tests on Wednesday, but are still below normal as seasonal works at a number of facilities continue. Shipments of Russian gas via the Nord Stream pipeline to Germany will continue to edge down, grid data show.