Energy commodities have been on a tear this week, thanks to the flare up in the geopolitical tensions in the Middle East. The Henry Hub Natural Gas futures contract (NG) rallied over 5% in the early New York session on Tuesday on top of the 3.5% gain seen in the previous session.
Trigger That Set Off the Spike: The simmering tension between the U.S. and Iran escalated violently over the weekend as the former along with Israel launched a major coordinated air campaign against Iranian military and strategic targets, prompting widespread retaliation across the region and sharply raising geopolitical risks.
Why Natural Gas Market Is Sensitive to Middle East Crisis: With 20% of global LNG trade moving through the Strait of Hormuz, ING economists see clear risk for the global gas market. Iran has claimed that the Strait of Hormuz, a major choke point for energy imports, has been closed. The economists noted that Qatar Energy’s announcement that it was halting LNG operations amid an attack served to exert upward pressure on prices. Its Laffan LNG plant produces one-fifth of global supplies.
“The gas market was vulnerable to a larger spike. This is because the global LNG market and EU gas storage are relatively tight, and Qatari LNG faces significant supply risks,” ING said.
According to Morgan Stanley most of Qatar’s 80 million tonnes per annum (mtpa) of LNG is supplied to Asia (70%). About 10% goes to Europe and the remainder to other countries.
The firm predicts that if the LNG market starts to price in an extended period of losses to Qatari LNG supply, the price of Title Transfer Facility (TTF) — Europe’s benchmark natural gas market — could spike to 80-100 euros/megawatt hours (MWh). This is equivalent to $28-$35 per million British Thermal Units (MMBtu).
The Dutch TTF Natural Gas futures trading (TTF) on CME soared over 20% to over $54 at last check. The Henry Hub natural gas futures, the benchmark for natural gas pricing in North America, gained nearly 5% to over $3 per MMBtu. The Japan Korea Marker (JKM) futures contract tied to the leading LNG pricing index in Northeast Asia, jumped nearly 25% on Monday.
The disparity between the two benchmarks is due to the European market facing higher geopolitical risks, the region’s dependence on LNG imports and supply constraints. On the other hand, the pricing of the underlying asset tied to the NG contract reflects an oversupplied, localized North American market.
Spatial Arbitrage In Play: U.S. LNG producers Venture Global and Cheniere Energy are reportedly going all out to increase production volumes at their facilities in Texas and Louisiana in order to meet the supply shortages in Europe and Asia, a Financial Times report said. Also, traders and other buyers of U.S. LNG are also reportedly rerouting cargoes to take advantage of the price spike.
Industry Lobby Group Center for LNG reportedly stated that U.S. suppliers have entered into “free-on-board” contracts, which would allow them to redirect cargoes from the U.S. after purchase, giving them the flexibility to take advantage of the price spikes in the event of a crisis.
Factoring in the opportunity, traders bid up stock prices of Venture Global and Cheniere Energy on Monday, with both stocks witnessing follow-through buying in Tuesday’s session.
Potential Impact: LPL Financial Head of Macro Strategy Kristian Kerr said, “Any sustained disruption to oil or natural gas flows, especially if both severe and long lasting, have the potential to influence inflation expectations, weigh on business confidence, and elevate volatility across asset classes.”
“The more intense and prolonged the geopolitical shock, the larger the likely market impact.”
Morgan Stanley warned of a spike akin to the one seen in 2022 when the Russia-Ukraine war started in the event of a multi-month delay, causing a substantial shock to the market. JKM LNG prices averaged around $34 in 2022, with a peak price of $70.
“With quick resolution, we would expect prices to drift back into the $10-11/mmbtu range initially, ultimately trending sub-$10 in the coming months, in-line with our published forecast,” the firm said."
