The risk of a war for gas supplies on the global market is present as Europe runs out of Russian supplies and this winter is colder.
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| Supply options for Europe have tightened since January 1, 2025, when the deal to transport Russian gas to Europe via a pipeline in Ukraine ends. (Source: The Moscow Times) |
The world is bracing for a battle over natural gas supplies this year, prolonging the pain for consumers with higher bills and power-hungry factories in Europe, leaving poorer emerging countries from Asia to South America at risk of being squeezed out of the market.
For the first time since the energy crisis sparked by the Russia-Ukraine conflict, the continent risks missing its gas storage target for next winter, setting the stage for a final scramble for supplies before new liquefied natural gas (LNG) capacity eases the situation next year.
Price competition
Although Europe has enough gas reserves to get through the winter and prices have fallen since the start of the year, inventories have been falling sharply due to cold weather on the continent over the weekend. Supply options have tightened since January 1, when a deal to transport Russian gas to Europe via a pipeline through Ukraine ended.
“There will definitely be an energy gap in Europe this year,” said Francisco Blanch, commodity strategist at Bank of America Corp. “That means all the liquefied natural gas (LNG) that is being put into use around the world is going to make up for the Russian gas shortfall.”
To meet projected demand, Europe will need to import up to 10 million tonnes of LNG a year — about 10% more than in 2024, according to Saul Kavonic, an energy analyst at MST Marquee in Sydney. New export projects in North America could help ease the market tightness, but that depends on how quickly production at these facilities can be increased.
With fewer options to replenish supplies for the coming winter, Europe will need more LNG, a large amount of which is expected to go to Asia, the world’s largest market. Depending on how demand shapes up, competition could push prices higher than countries like India, Bangladesh and Egypt can afford, putting pressure on Germany’s economic recovery.
European gas futures, which often also influence Asian LNG spot prices, remain around 45% higher than they were a year ago, and contracts are trading at triple their pre-crisis levels (2022) to date.
The price spike "will get worse if inventories in Asia-Pacific are also depleted, which will lead to competition for commodities," said Jason Feer, director of global business intelligence at Houston-based energy brokerage Poten & Partners Inc.
It’s not easy for all utilities and industries to find alternatives to gas. That’s a particular problem for Germany, which relied on Russia for more than half of its gas supplies before the conflict in Ukraine erupted in 2022.
With the manufacturing sector struggling with higher costs, energy security has emerged as a major issue in the country’s February 23 election. The far-right AfD party came in second in the polls in part because it wants to restore cheap pipeline deliveries from Moscow to bolster manufacturing competitiveness.
Vulnerable object
Developing countries in Asia will suffer as Europe cannot afford to pay high gas premiums, with some shipments diverted to take advantage of higher prices.
The situation is similar in South America. Brazil is struggling to replace its dwindling hydropower output after a drought, and Argentina could be drawn into the competition for LNG for the coming winter.
Egypt has also been affected, surprising markets last year when it switched from an LNG exporter to an importer as it struggled with summer power outages.
Last summer, the North African nation bought its highest amount of LNG since 2017, according to Bloomberg ship-tracking data. Egypt may still need dozens of cargoes this year to weather the coming hot season.
Money Making Opportunity for America
For LNG sellers, who have benefited from higher prices, the supply squeeze creates an opportunity, and in some cases they could ramp up capacity to mirror the surge in exports in the crisis year of 2022, said Ogan Kose, managing director at consulting firm Accenture.
Meanwhile, Laura Page at energy data firm Kpler said the outlook depends largely on the pace at which new production facilities can be started up. Last year, progress was slow because Egypt stopped exports and Russia’s newest Arctic LNG 2 plant was held back by US sanctions.
That has put the spotlight on the United States. The world’s largest LNG supplier has been trying for years to save Europe from gas shortages, and that message is likely to be amplified after Donald Trump takes office on January 20. He has previously threatened tariffs if Europe does not buy more energy from the world’s largest economy.
U.S. LNG exports are expected to rise about 15% by 2025, as Venture Global LNG Inc.’s Plaquemines plant and Cheniere Energy Inc.’s Corpus Christi plant ramp up production, according to Kpler. But the pace of the increase remains uncertain. Cheniere Corp. has warned that the increase this year will be “relatively slow.”
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| The US has become one of the largest LNG suppliers to Europe. (Source: Reuters) |
Possible revival of transit agreement?
In Russia, still Europe’s second-largest LNG supplier, the focus will be on whether the country can maintain exports after the US imposed sanctions on two smaller facilities on January 10.
According to Claudio Steuer, energy consultant and trainer at the global training and capacity development unit for the energy industry IHRDC (based in Boston, USA), Western sanctions have hindered the LNG 2 project in the Arctic, affecting the supply of key equipment and services, delaying the completion of the entire project by 2-3 years as planned.
Mr Trump, who has pledged to end the Russia-Ukraine conflict, could also change the overall market outlook, especially if a peace deal is signed that includes energy, as expected.
Russian pipeline gas exports through Ukraine could resume in 2025, according to a note by Anthony Yuen and other analysts at Citigroup Inc.
Redirecting supply
For now, Asia has the capacity to cede LNG supplies to Europe. Chinese LNG importers have resold cargoes for delivery until March and largely stopped buying from the spot market, where prices are high.
Meanwhile, Indian gas importers have switched to cheaper alternatives. Bangladesh was forced to adjust its purchase tenders after prices became too high. Egypt switched to diesel.
While mild weather in Asia has allowed gas demand to moderate, the tightening market raises the risk of volatility from severe weather or supply issues. Output disruptions at plants from Australia to Malaysia in 2024 have also highlighted how vulnerable production is.
But the silver lining is still ahead, according to Jefferies Financial Group Inc., with delayed projects expected to start shipping fuel by 2026. By then, the supply market could be “more relaxed.”
By 2030, an additional 175 million tonnes of LNG will come on the market, mainly from the United States and Qatar. That could help lower gas prices and attract customers back to countries that have been squeezed by supply shortages this year.
“If current LNG expansion plans are maintained, 2026 will be the year of light at the end of the tunnel for the European energy market,” said Florence Schmit, a European energy strategist at Rabobank.
The chances of an energy crisis in Europe are low at the moment, but the continent is becoming more vulnerable to volatile gas prices as it searches for alternative supplies. LNG imports are also becoming more expensive as it competes with buyers in Asia, potentially sparking a global supply war.
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