Natural gas prices skyrocketing in Europe as investors look on

Record high prices for natural gas in Europe are providing an opportunity for investors

Natural gas is a fundamental commodity in our world. Its uses include providing warmth for cooking and heating, fueling power stations which deliver electricity to private homes and businesses as well as supplying the electricity for things ranging from smartphones to traffic lights.  It fuels industrial processes for products and is a central ingredient for plastics, paints and fertilizer to name a few.

The pervasive use of natural gas in our everyday lives is why the recent price surge of this commodity is concerning. In early October, natural gas prices in Europe reached a new record of $1,200 per 1,000 cu m, equivalent to more than $100 per MWh. At the European virtual trading site TTF, prices reached $116 per MWh, a five-fold increase since the beginning of the year. In 2020, the EU depended on Russia for 43.4% of its natural gas supply, which has raised concerns among EU officials about the need to diversify its energy supply and reduce its dependence on Russia. 

The increase in price has also hit trading houses and other investors who have reportedly accumulated more than $30 billion short positions in European markets. 

Factors causing the spike in prices

Factors causing the price hike include: pent up demand for natural gas after the coronavirus pandemic. Increased shipments to markets globally have led to a decrease in shipments of gas to Northwestern Europe. In addition, low temperatures in Europe at the end of last winter led to increased demand for gas at a time when most suppliers are usually replenishing their inventory.

The increase in natural gas prices is leading utilities to look elsewhere for power, such as oil, and now even coal, which for years was scorned as the dirtiest fuel. However, should Europe look to switch to coal, that would cause a price spike there, and this is an area where Russia would not be able to supply all of Europe’s demands.

A perfect storm for the UK

For Britain, the shortage in fuel has led Prime Minister Boris Johnson to call in the military to ease the crisis. But the fuel crisis is almost a perfect storm of factors all coming together at once. In its pursuit to reduce carbon emissions, Britain has permitted companies to close gas storage facilities recently: coal-powered generators have been closed as well as aging nuclear power plants. Low winds at the beginning of September have meant less electricity from wind turbines. In addition, Britain’s supply of electricity from France was hindered due to a fire at a national grid facility. As one electricity consultant put it: “Six or seven things have gone wrong at the same time.” 

While the United States has a large natural gas supply, it, too, will see an increase in price, albeit not at the same levels as Europe and Asia, which are paying in some cases more than five times the price in the United States.

Investors looking to make a lemon into lemonade

Consumers around the world will be footing for the bill for this price increase one way or another. Electricity prices, heating apparatuses, or at the gas pump, it appears as if consumers will be shelling out significantly more money than in recent years. While this will undoubtedly hit many pockets, the price spike also provides opportunities.  

For example, soaring natural gas prices are expected to increase Exxon Mobil’s third- quarter profits by approximately $700 million, according to the company’s earnings guidance report. Exxon is just one of many companies operating along the natural gas supply chain. Many of these companies are investment opportunities for those seeking to capitalise on the price spike. Natural gas contracts have skyrocketed to unseen heights since 2008. Recently, prices crossed the $6 mark, which year-to-date is an increase of more than 100%, and since April 2021 around 130%. 

Norway, which supplies around 20% of the EU’s natural gas, has promised to increase its natural gas exports to all of Europe in October. Other gas may also reach the European market, although Europe’s unforgiving winters will certainly add stress to already low supplies. Investors will no doubt be following these developments and try to make lemon into lemonade by looking to companies benefitting the most from the price spike.

 

Forecasts are not an indication of future results.

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