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Surge in European natural gas prices amidst potential Australian supply disruption

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2023-08-10

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European natural gas prices surged by nearly 40% on Wednesday, driven by concerns over potential disruptions in global liquefied natural gas (LNG) supply from Australia. Prices on the Title Transfer Facility, the European benchmark, soared to over €43 per megawatt hour, a significant increase from the previous day's nearly €30, marking the highest level since mid-June.

Reports of impending strike action by workers at key LNG plants in Australia for better pay and job security triggered the price surge. This market movement was exacerbated by traders closing out bets that gas prices would decline.

The increase underscores the ongoing energy crisis in Europe, persisting for almost two years. Despite EU gas storage levels nearing capacity, the vulnerability of supplies continues to make markets nervous. Although Australian LNG supplies seldom directly flow to Europe, the EU has increasingly relied on global seaborne LNG cargoes to offset the reduction in Russian supplies following the Ukraine conflict.

Analysts note that despite lower prices compared to last summer's peaks, markets remain cautious about potential supply disruptions. Callum Macpherson, head of commodities at Investec, emphasised that full gas storages don't necessarily guarantee stability. He highlighted the uncertainty of the upcoming winter and noted "significant tail risks" for Europe's gas situation.

In 2022, the EU became the world's largest LNG importer as it sought to replace lost Russian pipeline gas. Australia, a key supplier to Asia, could compete with Europe for available cargoes if the market tightens. ICIS consultancy pointed out that reduced Australian supply might prompt Asian buyers to increase purchases from other sellers like the US and Qatar.

Although similar price surges have occurred earlier this year, they have often receded later in the day. On the same day, oil prices also climbed, with Brent crude reaching $87.65, its highest level since January. Rising energy costs could complicate central banks' efforts to manage inflation.

EU gas storage facilities, critical for meeting winter demand, are nearly 90% full, a level the European Commission aimed to reach by November. Some traders anticipate reaching full capacity by September. Citigroup analysts cautioned that if the Australian strikes persist through winter, European natural gas prices could double by January, potentially reaching €62/MWh.

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