Showing Its Hand — Europe’s Need for Natural Gas

January 19, 2023

Sources: Bloomberg, New York Mercantile Exchange Sources: Bloomberg, New York Mercantile Exchange

As we approach the one-year anniversary of Russia’s horrific invasion of Ukraine, it’s evident that the world has changed dramatically as a result. The loss of life in Ukraine and the pain and suffering caused by the invasion are irreparable. Hopefully, the war will end soon, giving the country a chance to rebuild. 

One of the first steps Russia took after invading Ukraine was weaponizing its energy supplies to Europe. As a result, Europe had to move quickly to shore up other energy sources to power its homes, industries and utilities. Prior to the invasion, Europe imported 83% of its natural gas and a significant portion of that came directly from Russia via pipeline, according to the European Council and the Council of the European Union.1 

In the months following the invasion, Russia began to restrict the flow of that natural gas via its Nord Stream pipeline. Then, in the fall of 2022, the pipeline exploded due to sabotage.2 As European nations prepared for the winter (when more natural gas is used to heat homes), it became even more imperative for them to store this vital resource. 

Amazingly, Europe was able to shore up its storage in just a few months, thanks in large part to U.S.-based natural gas producers, which were able to ship out a significant amount of liquefied natural gas (LNG) to Europe and the rest of the world. 

Fortunately, the winter weather in the U.S. and Europe has been very mild so far, allowing natural gas storage to stay at high levels. In fact, the levels are so high that LNG tankers have been idling off the coast of Europe, awaiting room to unload their cargoes. As a result, we’ve seen a significant collapse in natural gas prices worldwide — to the point that the prices today are even lower than before Russia invaded Ukraine.

Interestingly, as seen in this week’s Chart of the Week, the price for natural gas in Europe had been moving up relative to the price in the U.S. since the middle of 2021, well before the invasion. However, in the spring of 2021, Russia began amassing troops near the Ukraine border and conducting training exercises. Natural gas prices started moving higher around that same time as the world and Europe, in particular, began to prepare for the eventual invasion and its potential ramifications. 

Perhaps natural gas prices moved up too far, too fast, as European prices neared $100/Metric Million British Thermal Unit (MMBtu) by August 2022 compared to natural gas prices in the U.S. approaching $10/MMBtu. This move demonstrated how potentially vulnerable Europe is to an energy shortfall and how critical natural gas is to the world. 

Today, with the price in Europe coming back down to about $20/MMBtu compared to about $3.50 for the U.S., it still makes a lot of sense for U.S. producers to export LNG to Europe. The weather has been a great savior for Europe and its energy prices so far this winter, and storage levels remain high. Russia has left its mark on the rest of the world in many ways. This invasion has certainly put Europe on notice that it cannot rely on just Russia for its natural gas, and preparing for eventual colder weather (this year or incoming winters) is the only option. 

Key Takeaway     

Many U.S. natural gas companies can produce gas for significantly below the current $3.50 level and therefore will continue to be able to supply natural gas in the U.S. and abroad. U.S. natural gas companies should have a strong future as they are some of the lowest-cost producers in the world and provide a resource that is critical to today’s global infrastructure, as well as being a key part of the energy transition. 

Clearly, the lower natural gas prices today compared to significantly higher prices in 2022 will pose earnings headwinds for the year ahead. Keep an eye out for opportunities to own or lend to the best and lowest-cost operators in the U.S., which are even more valuable today given the events that have transpired in Russia and Europe.



1Source: Council of the European Union- Infographic - Where does the EU’s gas come from?; 11/7/22  

2Source: New York Times- In Nord Stream Mystery, Baltic Seabed Provides a Nearly Ideal Crime Scene; 12/26/22

Tags: Natural gas | Russia | Energy Sector | Earnings

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