British and European wholesale gas prices have spiked following the extended closure of a US liquefied natural gas (LNG) facility, escalating fears of supply shortages this year.
Freeport LNG suffered an explosion and raging fire at its terminal, forcing the company to cease operations for three weeks.
This caused UK and Dutch benchmarks to skyrocket 24 and 10 per cent respectively this morning, with over one million tonnes of LNG now expected to be off the market this month.
The LNG facility, based off the Texas Gulf coast, is just one of just seven operating terminals in the US and has been supplying consistent shipments to Europe to help meet its gas needs.
At peak operations, it can provide 2.1bn cubic feet of natural gas per day – representing 17 per cent of the total US LNG capacity.
An investigation into what prompted the explosion is already underway, a spokesperson for the company told news agency Reuters, without elaborating on the cause of the fire.
The explosion was captured on film by the nearby Quintana Beach Country Park and posted on Facebook later in the day.
EU dependency on US leaves bloc vulnerable
The European Union (EU) has been particularly dependent on US LNG amid supply shortages from Russia, with the bloc staving off supply shortages last winter with top-ups from American tankers.
It relies on Russia for around 40 per cent of its gas imports, with the country’s invasion of Ukraine exacerbating concerns of supply disruption this winter.
The outbreak of conflict in the country has triggered a raft of Western sanctions targeting Russian energy supplies and financial institutions, while Russia has brought in rouble requirements to pay for its gas and has cut off supplies to four European countries.
Reflecting escalating tensions between the Kremlin and the West, key pipeline Nord Stream 1 – which runs across the Baltic Sea from Russia to Western Europe – has suffered a heavy dip in flows over the past few weeks.
Earlier this year, Germany and Austria both triggered the early phase of emergency plans that could lead to the government confiscating and distributing supplies in the case of potential shortfalls.
The trading bloc has demanded its member states raise storage levels to 80 per cent of capacity ahead of winter, but the latest data from Gas Infrastructure Europe suggests it is barely half-full.
Craig Erlam, senior markets analyst at OANDA told City A.M.: “Europe has relied on US LNG to allow it to wean itself off Russian gas and events like this make those near-term targets that much harder. The longer it takes the facility to get fully back on line, the longer prices will remain high as there isn’t an abundance of alternatives.”
Markets were already tight due to global supply chain disruption and rebounding post-pandemic demand from Asia.
Callum Macpherson, head of commodities at Investec, noted that while European prices have risen, US benchmarks have dipped following the news.
Speaking to City A.M., he explained: “This is negative for US gas prices as it limits export demand and this has brought US gas prices down from 14-year highs. However, the potential disruption to the supply of LNG to global markets – which are needed to build up inventory ahead of the coming winter – led to European gas prices spiking sharply this morning.
The explosion comes amid warnings from the International Energy Agency (IEA) that Europe could be forced to ration energy if Chinese demand rebounds and winter weather is colder than expected, forcing households to use more supplies.
Speaking at the organisation’s conference earlier this week, IEA chief executive Fatih Birol said: ““I am especially worried about the natural gas markets…if we have a harsh and long winter we may see very difficult days [ahead] . . . I wouldn’t exclude the rationing of natural gas in Europe, starting from the large industry facilities.”