Natural gas, LNG prices soar on Middle East supply fears

A prolonged rise in natural gas prices triggered by the ongoing war in the Middle East will dampen European growth and hit some Asian economies hard, analysts warned..

Global gas prices have soared this week amid fears of prolonged disruption to energy flows through the Strait of Hormuz, a key shipping route between Oman and Iran. It handles a fifth of the global LNG trade – as the Iran conflict escalates.

Dutch Title Transfer Facility (TTF) futures, Europe’s benchmark gas contract, rose 35% on Tuesday to more than 60 euros ($69.64) per megawatt-hour. During the week, prices increased by about 76%.

Northeast Asia’s LNG benchmark, the Japan-Korea-marker (JKM), which captures deliveries to Japan, Korea, China and Taiwan, hit a one-year high and was last seen at 43 euros per megawatt-hour. UK natural gas has also increased sharply.

Qatar, one of the world’s largest LNG producers, halted production on Monday after an Iranian drone strike at Ras Laffan Industrial City and Mesaieed Industrial City. Goldman Sachs estimates that the break would reduce global LNG supply by about 19%.

A senior Iranian Revolutionary Guard official later said the country had closed the Strait of Hormuz to all ships and warned that any vessel attempting to pass through the channel would be attacked. However, according to a Fox News report, the US said the route was open.

Much of Europe and Asia is more exposed to potential gas price shocks than the US, which benefits from domestic shale and LNG production.

LNG accounts for about 25% of Europe’s total gas supply, according to Chris Wheaton, oil and gas analyst at Stifel. With roughly 20% of global LNG production sitting behind the strait, a prolonged disruption could trigger a supply squeeze comparable to the 2022 shock following Russia’s invasion of Ukraine, he said in a note.

“We are more concerned about European gas prices than oil prices,” Wheaton said.

The Norwegian energy giant shares EquinorOne of Europe’s biggest natural gas suppliers hit a 52-week high on Tuesday, adding more than 2% after closing up more than 8% the previous session.

In a note published on Monday, Goldman Sachs warned that a month-long stoppage of flows through Hormuz risks driving TTF and JKM prices towards 74 euros per megawatt-hour. This “triggers large natural gas demand responses” in the event of a 2022 European energy crisis.

European gas prices eventually rose to 345 euros per megawatt-hour in August 2022 as Russia weaponized its natural gas exports in response to EU sanctions, cutting supplies, which drove up domestic energy bills and sparked a continent-wide cost-of-living crisis.

In a separate note later on Monday, Goldman raised its April TTF forecast to 55 euros per megawatt-hour from 36 euros per megawatt-hour, with its average second-quarter forecast now at 45 euros/MWh.

Patrick O’Donnell, chief investment strategist at Omnis Investments, said LNG is now a key area of ​​concern for Europe’s wider economy. “This could have more negative implications for the European economy and the reindustrialization that the market is hoping to see,” O’Donnell told CNBC’s “Squawk Box Europe” on Monday.

Indeed, Goldman Sachs analysts led by Sven Jari Stehn noted that “the effects of higher energy prices on GDP will be negative for most countries, except Norway, which produce and export oil.”

Goldman Sachs estimates that a sustained 10% rise in energy prices over four quarters would cut GDP by 0.2% in both the UK and the euro area. Switzerland, which relies heavily on nuclear and renewables, was flat, while Norway – an oil exporter – saw a 0.1% boost.

In contrast, Goldman analysts see “limited upside risk” to US natural gas prices.

Asia is also vulnerable to supply disruptions.

Invesco estimates that about 58% of India’s LNG imports come from the Middle East, which accounts for about 2% of its primary energy consumption. About 27% of Singapore’s LNG imports come from the region, accounting for 2.2% of primary energy consumption.

Other Asia-Pacific countries source more than 37% of their LNG from the Middle East, Invesco said, which represents about 3% of primary energy consumption, while 26.6% of China’s LNG imports originate there.

Countries that rely heavily on imported oil and gas with limited fiscal space, including Japan, India, South Africa, Turkey, Hungary and Malaysia, are more vulnerable to energy disruption shocks, while Norway, Canada and Mexico are less exposed, said Elias Haddad, global head of BBH.

“A protracted conflict leading to further disruptions in energy production and transportation could increase the risk of outages and add to fiscal pressures,” Haddad said in a note.