Natural gas price record, it’s almost too soon
You could wait for it. While the oil price collapsed soon after the start of the corona crisis, the effect on the price of natural gas was initially more limited. But while the oil price recovered in May due to production restrictions, historically low prices are now being paid for natural gas.
The price for a cubic meter of natural gas dropped below 4 cents per cubic meter at the end of last week, and after the weekend the recovery was only limited. This century natural gas was not so cheap.
These are favorable numbers for large consumers of natural gas, such as factories, power stations and horticultural greenhouses. But for the fossil sector and sustainable entrepreneurs, low gas prices are a black line. Four questions about natural gas that are almost impossible to give.
1 How did the natural gas price get so low?
Last year, the European natural gas market was already overfed, and that was followed by the corona crisis. Due to the mild winter of 2019, a large gas supply remained in the underground storage facilities in Europe – gas is stored in depleted gas fields or salt domes. At the same time, a lot of natural gas was dumped on the European market because demand in Asia was disappointing. In the summer of 2019, 17 cents per cubic meter was still paid, after which a steady decline set in.
What followed was a quack winter without snow and the corona crisis. The use of natural gas has been less affected by the economic crisis than the demand for oil. Natural gas plants continued to run smoothly, the heating remained on. But the demand for electricity fell somewhat, and factories (such as refineries) also demand less natural gas.
Although the storage capacity for natural gas in Europe is large, it is now becoming apparent how quickly those storage facilities are filling up. “The peak that is normally reached in November, at this rate, will already come at the end of August,” provides energy economist Hans van Cleef of ABN Amro. “And then it becomes super interesting what will happen next.”
In such a situation, the US oil price turned negative for a few hours in April. It cannot be ruled out that this could also happen with the gas price. “It is the ultimate market power tool,” writes independent energy analyst Jilles van den Beukel in a column for stock exchange news site IEX.
2 What are the economic consequences?
“It hurts for the Shells of this world,” says Van den Beukel. Norwegian energy analysis firm Rystad expects global use of natural gas to be 2 percent lower in 2020 than last year. That is less drastic than for oil demand, which is falling by 9 percent, according to the International Energy Agency. But those figures are distorted, explains Van den Beukel: “The natural gas sector is used to strong growth, unlike the oil sector.” According to Rystad, the industry grew 3 percent every year for the entire past decade.
And now? There is no cartel that makes production agreements like OPEC does for oil, but market parties pull the brakes. In the United States, the number of active gas production sites in key gas regions has fallen by a quarter in two months, the government energy agency EIA reported last week.
The transport of natural gas to Europe is also declining. For gas that comes by pipeline from Russia, the tap is simply turned off a bit. It is more difficult for liquefied natural gas (LNG) that is shipped by tanker.
Bloomberg news agency reported earlier this month that an unusually high number of tankers are floating offshore in Qatar, which produces a lot of LNG, because customers do not like to see the ships coming. However, LNG tankers have limited storage capacity: 0.5 to 1 percent of the cargo evaporates every week.
Traders have also been reported who simply cancel tankers and take the fine for granted. According to energy expert Erin Blanton of Columbia University, 25 LNG shipments from the US have been canceled recently. It will throw the fast-growing LNG sector off balance, she foresees. Many LNG factories are being built, but LNG is expensive. “Existing LNG projects now deliver below cost,” Blanton writes. She expects that large oil companies will partially shut down their existing LNG factories in the near future, although that will be expensive and drastic. Investment decisions for new projects are already being postponed, projects under construction are on the back burner.
3 Is renewable energy in trouble?
Cheap natural gas makes it less attractive to reduce the use of natural gas. “Sustainable entrepreneurs notice that customers are hesitant because the competitive position of everything that replaces natural gas is deteriorating,” says director Olof van der Gaag of the NVDE sector association. Companies or private individuals who want to insulate, are unsure whether this is the right time.
It also plays a role in the horticultural sector, says Jasper Elzinga of the specialized service provider AgroEnergy. “The business case for geothermal energy is difficult, we hear from the sector. Ultimately, the Netherlands wants to use less gas, but at the moment it is difficult to get people to do that.”
A government subsidy (SDE++) should enable sustainable heat projects such as geothermal energy or biomass boilers to compete with heat from natural gas. However, an upper limit has been set for the subsidy amount, so that projects could still experience financial disadvantage if the price of natural gas was very low. NVDE director Van der Gaag has not heard that this is already happening, but is concerned. “We advocate that the SDE++ scheme be revised, with the current natural gas price.”
4 Is it good for the energy bill?
The price for natural gas contracts for consumers is also falling. Earlier this year, the Milieu Centraal information agency assumed a price of 81 cents per cubic meter for 2020, now energy suppliers are advertising prices around 70 to 75 cents per cubic meter.
Whether a private individual benefits from this depends on the contract, which can be fixed or variable. The fact that citizens will never come close to natural gas for a penny is due to the energy tax that is much higher than for large consumers. They pay a few cents in tax per cubic meter, a household pays 41 cents.