Why are Gas Prices So High?
International gas prices have experienced a roller coaster ride in the past year, from historic lows to unprecedented highs. In this OIES Comment, we analyse the drivers behind this pricing fluctuation, and offer an outlook for the coming winter. In order to avoid the distorting effects of the COVID-19 pandemic in 2020, we compare the year to date (January-August) 2021 with the same period in 2019. On the global LNG market, the supply-side increase in nameplate export capacity was offset by outages at a number of export plants. By contrast, LNG demand outside Europe surged. This meant that growth in supply simply did not keep pace with the increase in demand. With Europe as the ‘balancing market’ for global LNG, its role as the absorber of excess volumes in 2019 was reversed in 2021, as European LNG imports declined. On the European market, the decline in LNG imports was accompanied by a decline in European production and pipeline imports from regional suppliers, most notably Russia. Yet demand remained at the same level as 2019, and the gap was met by net storage withdrawals. Therefore, we conclude that with both the global LNG market in general and the European market in particular noticeably tighter, the ongoing price rally is driven by fundamentals, with an added ‘fear premium’ that the forthcoming winter could be as cold as that in 2020/21. If that proves to be the case, the current price levels will persist, and even rise, while a milder winter could see the market turn slightly more bearish.