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Welcome back to Energy Source, coming to you from London.

One must-read story to start with: my colleagues have dug through Russian and Indian customs data and revealed that Russia is exploiting a loophole in the G7-imposed oil price cap by inflating shipping costs.

“Russian entities may have covertly made a billion dollars more in revenue,” my colleagues report. Read the full story here.

But in today’s newsletter I want to talk about natural gas. It has been in the headlines recently due to potential strikes at critical LNG plants in Australia, which have sent European gas prices surging, as I explained last week.

Even with last week’s surge, the price of European benchmark TTF is significantly lower than this time last year. In spite of this, industrial gas demand also remains low, which has left market observers scratching their heads. That’s the topic of the main note.

In Data Drill, I look at who stands to lose the most from the potential strikes at Australian LNG plants.

Thanks for reading. — Shotaro

Where is the industrial gas demand?

Last year’s record-high gas prices forced many European companies in energy-intensive industries from fertiliser and steelmakers to cement and glass manufacturers to reduce, or even shut, their operations. Many observers had expected that this year, with gas prices significantly down, demand would recover.

The reality is, it hasn’t — which has kept EU gas storage levels at record highs and gas prices low. Europe’s benchmark TTF is now around a tenth of what it was at the peak of the energy crisis last year.

In the first seven months of the year, industrial gas demand in nations with the most consumption — Germany, Italy, the Netherlands, the UK, France and Spain — was down 12 per cent compared with last year, data from S&P Global Commodity Insights showed. Compared with the same period in pre-energy crisis 2021, demand is down nearly 30 per cent.

So where has industrial gas demand, which accounts for about a quarter of the EU’s consumption, gone? Some analysts have recently tried to solve the mystery.

Citi, in an early August note, provided four reasons that seem to be becoming the consensus among gas market watchers:

  • Some firms have become more energy efficient

  • Some firms have decided not to restart for now?.?.?. for fear that high prices would return and force them to shut operations

  • Weak macro[economic environment]?.?.?. that has affected domestic and export markets, with the result that some firms have lower operating rates

  • Some industrial demand is also likely to be lost permanently due to the relocation of companies out of Europe

A prime example of the last reason is the chemicals giant BASF, which has downsized in Germany and is looking to invest outside of Europe. Instead, the company is looking towards China and the US, which are offering companies generous tax incentives and access to green energy and regulatory fast-tracking.

Goldman Sachs also argued in a note this month that the issue isn’t about gas prices anymore, but rather the macroeconomic environment. Specifically, it cited energy-intensive industries’ slow destocking (the reduction of inventories) of finished goods, which “has been much more impactful and longer-lasting” than the investment bank had anticipated.

“A lack of finished goods restocking ultimately limits the pull for industrial production — and industrial demand for gas — to rebound,” it said, adding that high finished goods inventories “have driven an 8 per cent year-on-year decline in industrial demand for gas this year?.?.?. and nearly all of its 9 per cent decline observed in June”.

But there are signs that industrial gas demand may come back.

Goldman said that the destocking is close to the trough of the cycle, with rising disposable income supporting goods consumption. The logic is if there is healthy destocking, industries will begin producing again, driving up gas demand.

Anna Galtsova, research and analysis director at S&P, said lower gas prices may also start to play a role. Energy-intensive companies typically use gas- hedging contracts to fix prices long term. “Driven by much lower spot prices?.?.?. the cost of hedging contracts will keep declining through to the second quarter of 2024”, she said, which should incentivise industries to start using gas again.

Galtsova added that gas consumption in Germany, France, Netherlands and Spain is now around the 2022 levels, with German demand trending 15 per cent above last year’s levels since late July.

Whether industrial demand makes a strong comeback remains to be seen. But if it does, and with the potential for a competition with Asia for liquefied natural gas cargoes on the horizon (more on that in Data Drill), don’t be surprised to see TTF prices much closer to €100 per megawatt hour ($32 per mn British thermal units) come the winter.

Data Drill

Potential strikes at Australian LNG export plants rocked the global gas market last week.

Australia’s Woodside Energy and American company Chevron, the operators of the plants, are in talks with unions to avoid strike action. But if unions do go ahead with a work stoppage, it would significantly impact global LNG supplies, not least in Asia, where almost all of the 24mn tonnes (about 33bn cubic meters) of LNG exported from the affected projects have headed this year.

North Asian countries are some of the world’s biggest LNG buyers; if the strikes go on for a prolonged period, these countries will have to compete with Europe for the super-chilled fuel in order to replace the lost volumes.

The EU has become increasingly reliant on the fuel to replace Russian pipeline gas, and the competition will probably push global gas and LNG prices higher.

Japan would be the most affected from the strikes, with the three plants in question, Chevron’s Gorgon and Wheatstone LNG projects and Woodside’s North West Shelf, accounting for 26.5 per cent of the country’s LNG imports this year through to July, according to data from Refinitiv. Similarly, the three projects accounted for about 25 per cent of Taiwan and Thailand’s LNG imports in the same period.

The impact on China and South Korea is more muted, only accounting for 14 per cent and 8 per cent of imports, respectively.

Column chart of (LNG imports, in mt) showing Potential strikes in Australian LNG plants hurts Asian importers

Power Points


Energy Source is written by the FT’s global energy team. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.

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