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Could the natural gas rally cause a global slowdown?

Soaring prices may cripple economic output and have a long long-lasting impact on countries which are heavily reliant on Russian gas.

September 17, 2022 / 11:48 AM IST

Navneet Damani, Senior Vice President - Commodity & Currency Research at Motilal Oswal Financial Services

Natural gas prices in Europe are at their highest levels since 2008, buoyed by prospects of increased demand for US LNG exports amid a deepening energy crisis in Europe.

In the US, gas power generation has continued to outperform this summer as a series of heat waves have pushed demand to record highs.

Higher gas prices have also kept US export terminals busy as traders captured arbitrage opportunities by shipping gas abroad.

Russia recently slashed gas exports to Europe by 80 percent, putting upward pressure on European natural gas prices. European Union (EU) countries have since agreed to cut consumption of Russian gas by 15 percent over the next eight months.

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Natural gas bulls were disappointed with the announcement by leading US gas exporter Freeport LNG that it will resume operations from November. Freeport had shut production in June following a fire.

Any drop in export terminal of natural gas is negative for prices as US demand takes a toss and the inventories would see a build as export terminals are closed.

Freeport expects initial production to begin early-mid-November, with a sustained output of at least 2 bcf/d (billion cubic feet per day) by end-November. This would represent more than 85 percent of the facility's export capacity.

Russia’s Gazprom will halt supplies on the North Stream 1 pipeline to Germany for three days on account of maintenance. It is speculated that it will be much longer than that, as Russia wants to hurt EU over its support for Ukraine. This lower flow could jeopardise Europe’s efforts to fill storage systems before the onset of winter.

Prices have been about seven times higher than they are at this time of the year. Soaring prices have brought back fears of recession as such prices may cripple economic output and have a long long-lasting impact on countries like Germany, France, and Spain, which are heavily reliant on Russian gas.

Germany’s Rhine river has plunged to extremely low levels after a period of drought, which could threaten the transport of key commodities. French output is narrowing for the first time in a year and a half, mirroring the trend seen in Germany, as Europe’s biggest economies succumb to record inflation and snowballing ambiguity over the war in Ukraine. A recession in the 19-member Euro zone is now more likely than not.

Investors should keep a watch on the hurricane season as any disruption of US terminals can be negative for prices. The ongoing drought in western US has drained rivers and reservoirs, with Lake Mead recently falling to a record low.

That threatens to curb the power produced by hydropower dams and will prompt electricity utilities to up usage of natural gas in order to satisfy demand.

Pollution control efforts by the US government could also trigger demand for natural gas, which could favour bullish sentiments.

The crucial question is whether gas will flow uninterrupted. With Europe planning to bring down its gas use, Russia’s leverage is blunted.

For this quarter, gas prices are expected to touch $12 per million British thermal unit (mmbtu) in the coming months.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Navneet Damani is the VP – Commodity Research at Motilal Oswal Financial Services.
first published: Sep 17, 2022 11:48 am
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