The gas crisis in Europe is not entirely surprising. It has been looming since at least June, when stocks began gradually declining below normal levels during the summer, and the problem has worsened with gas prices more than tripling this year.
Several reasons led to the transformation of Europe from excess supply to scarcity in two years.
The first reason is the competition between Europe and Asia for LNG shipments. Most of the LNG supply is tied to long-term contracts, destined primarily for Asia, which means that the supply in the spot market is less than half.
Also, these contracts are usually linked to crude oil prices, which are currently cheaper than the spot market prices for gas.
This means that buying countries are more likely to stick to their contracts, leaving smaller quantities available for the spot market. Also, despite the rise in gas prices to Europe, they remain lower than prices to Asia, which is the largest importing region.
That’s because countries from Japan to India are rushing to buy before winter, increasing competition for the small portion of the freely-traded supply in the spot market.
The shortage has recently worsened with a strong rise in demand from China after its rapid exit from the Corona crisis, in addition to Brazil facing the worst drought in a decade that pushed it to use liquefied natural gas to produce electricity instead of generating it from hydroelectric dams.
Another reason for the gas shortage in Europe is the decline in supplies from Russia coming through Ukraine, and this is a question mark that has raised mixed speculation between the Russians’ inability to pump more or that they are deliberately pressing for the speedy operation of the Nord Stream 2 pipeline, after its construction was completed in the past weeks.
In addition, freight rates play a role in the fate of shipments and the markets they will go to.