Natural gas over the past two years has been one of the most volatile commodities, and recently the tension which remains in the market was recently highlighted by news of potential strikes at LNG plants in Australia. Earlier in August, European TTF prices climbed by over 30% in a single day of trading as news broke that strike action was being considered, while last week a similar price climb occurred on the NYMEX LNG benchmark for Asia as votes began on the potential strikes. In the last 24 hours, however, prices have softened on the news that talks are taking place to resolve the disputes and avoid strike action. In this weeks’ blog, we will look at how this situation has developed so far and what it indicates about the current natural gas market.
Earlier this month, news broke that workers at Australian LNG plants run by Woodside Energy and Chevron planned to strike to demand better pay and working conditions. The affected plants contribute to around 10% of the global LNG market, and consequently the impact of the strikes were felt far beyond Australia. The jump in benchmark gas prices in Europe and in Asia reflects the significance of Australian LNG exports for the global market.
According to data from the EIA, Australia remained alongside Qatar as the leading exporting nations of LNG in 2022. Indeed, as the global gas trade was reordered following Russia’s invasion of Ukraine and Europe’s need to transition away from Russian-produced gas, Australia increased its LNG exports significantly in 2022. This role as a leading player in the global gas market is crucial to understanding why the recent threat of strikes has caused such a stir for prices. The potentially-impacted plants, Woodside Energy’s North West Shelf and Chevron's Gorgon and Wheatstone projects, together contribute around 10% of the global LNG supply. As a result, any extended disruptions at these plants would affect not only the main importers of Australian LNG, but the whole market.
Markets on Edge
The respective market reaction in Europe and Asia to the news of strikes reflects on the differing challenges for the two regional gas markets. In Europe, the rise in TTF prices on the initial news shows the tension and uncertainty around energy security that remains for the continent as it adapts to the post-Russian energy era. As was the case last year, European countries are attempting to fill gas storage facilities ahead of the winter months to minimise the cost increases that are normally expected with the coldest season.
Last year, a mild winter meant that Europe emerged into spring with gas reserves remaining at record-highs for the time of year which has subsequently allowed refilling to happen ahead of schedule. Indeed, according to data from Gas Infrastructure Europe, storage facilities are now over 91% full across the EU as a whole. John Kemp noted for Reuters that storage usually peaks around the 26th of October, but that due to the high levels already accumulated, the drawdown may begin earlier this year. Nonetheless, Europe’s gas reserves are looking well-prepared for the winter and, therefore, TTF’s price volatility connected to the Australian strikes reflects nervous traders more than it does fundamental issues. This situation may change should Europe’s industrial sector finally recover its gas demand, which remains over 30% lower than pre-2021, however this does not appear imminent, as documented in a recent article by the FT.
The market reaction in Asia was less driven by the nervousness of a market traumatised by the past two years, and more by the fundamental reliance on Australian LNG imports for the region. According to the EIA, the top three biggest importers of LNG in 2022 were Japan, China and South Korea, with Taiwan also placing in the top six. The regional reliance on imports therefore makes all of these countries highly vulnerable to an extended period of reduced production from a key supplier. For top importer Japan, the issue has been compounded by recent heatwaves which have driven increased air-conditioning use. According to government data reported by Reuters, LNG inventories held by Japanese electric utilities currently stand below the five year average, having been drawn down by this recent increase in demand.
Resolution in Sight?
Just as markets rallied on the original news of strikes, on Thursday 24th August reports emerged that the union representatives for the workers at Woodside Energy’s North West Shelf plant have reached an agreement in principle to avoid strike action. Despite news also breaking that the unions representing the staff at Chevron’s two plants have indeed voted to proceed with strike action, TTF prices have subsided from the heights of last week; the length of strike for Chevron’s workers could be key to determining if prices will rally once more on this news. As the past few weeks have demonstrated, understanding why prices will move next and why remains as challenging as ever in natural gas markets.