Does US LNG Affect European Gas Prices?
The situation of the US LNG shale gas boom has not only changed the landscape of the country’s economy, but has also influenced gas prices globally. How big is the impact on the European market? Are the price fluctuations really in the hands of the US LNG sector or are other forces at play?
US Takes the Lead
When it comes to Europe, the United States haven’t yet established itself there when it comes to LNG supply. There are more significant providers, leaving Americans as only the sixth largest LNG supplier in the region. Although, it is slowly becoming a force to be reckoned with. In just one year the country’s market share has grown from 0.6% in 2016 to over 5% in 2017, Charles River Associates report. With the growth projected to continue, the influence of US LNG on European gas prices is set to rise as well.
With the US becoming a net exporter of gas and eventually the world’s leading LNG supplier, the Henry Hub could gain importance as the price driver for the global market. In 2017, the price difference was $2/MMBtu with the European price averaging around $5/MMBtu and in the US Henry Hub around $3/MMBtu. Granted, with freezing and liquefying the gas, shipping it on tankers and then re-gasifying it, the US gas price can grow in the range from $5 to $7 per MMBtu in Europe.
Nevertheless, such developments threaten Russia’s position in Europe, so it has taken steps to thwart the US from encroaching on its market share. From January 1st, 2018 Gazprom was allowed to sell natural gas at an unregulated price in Europe, thus further lessening the attractiveness of US LNG in the continent.
In a roundabout way, gas price determination in Europe strongly depends on Asian hub prices as well. Higher gas prices in Asia attract US LNG supply, pulling it away from Europe. This means that LNG position as the price driver decreases. The opposite is true as well, LNG takes over a more dominant place in Europe with Asian gas prices lessening.
However, the US is gaining traction with more LNG terminals coming into play, raising their export capacity. The higher supply may mean that the US will be able to cover both regions regardless of the fluctuations in price in either place. This would obviously be done as long as the average import price isn’t too low to cause losses.
It is worth mentioning, that the US is not the only force affecting the pricing of natural gas in Europe. In the end of 2017, it became obvious that unforeseen issues also have a hand in the game.
Natural gas supply was affected by the crack in the Forties gas pipeline in the North Sea as the outage caused UK’s Elgin-Franklin and Britannia natural gas fields to shut down. This was not the only problem encountered, in the Netherlands a compression station experienced problems and as a result, gas shipments to the UK had to be reduced. But how does this relate to gas prices?
Due to the UK not having a lot of gas storage, a situation worsened by the country’s largest gas storage site, Centrica, going offline, the disruptions in supply mean higher prices. And that is where US LNG comes in. The gas shortage might spur the import of LNG, driving up its prices in competition with Asia.
US LNG is getting more and more entrenched in the European gas market, starting to become a player in price setting. Obviously, other factors contribute to the fluctuations, but more often than not it comes full circle back to the growing influence of the US.