A liquefied natural gas plant on the Russian island of Sakhalin
A liquefied natural gas plant on the Russian island of Sakhalin. Russia, Europe’s largest supplier, has sent less gas to the continent than before the pandemic © REUTERS

Natural gas prices in Europe and the UK have soared to some of the highest levels on record, threatening to raise costs for households and businesses as global supplies of the critical fossil fuel remain tight.

In the UK, prices have risen above 100p a therm, the highest level since 2005 and a record for the summer. In Europe, prices have hit €40 per megawatt hour for the first time. A therm measures the amount of energy contained in natural gas and is sometimes used to calculate utility bills.

Prices in Asia are also elevated as countries try to attract cargoes of liquefied natural gas to meet strong demand, with the spot price of LNG cargoes above $15 per million British thermal units (MMBTU), according to energy consultancy ICIS. Prices in Europe and the UK, when converted, are near $14 per MMBTU.

The widespread strength in prices is raising fears that a global supply squeeze on the fuel — one of the world’s most important because of its broad range of uses, from industry to power generation and heating — will only intensify.

“If anything, it’s surprising there hasn’t been more concern,” said Tom Marzec-Manser at ICIS. “In terms of additional supply, there aren’t many options on the table globally. Russia is really the only discretionary source of supplies out there but we don’t know when additional deliveries might start. So traders around the world, from Japan to Brazil, are starting to watch European prices too.”

Line chart of UK wholesale gas price, pence per therm, showing natural gas price in the UK soars to highest level since 2005

A prolonged winter drained storage levels across Europe while Russia, the largest supplier, has sent less gas to the continent than before the pandemic. Critics believe Moscow is trying to pressure the EU to approve the launch of the controversial Nord Stream 2 pipeline later this year.

Russia has declined to send top-up volumes via Ukraine in recent months, despite the rise in prices and the strength of demand in mainland Europe.

But Russia has not been the only factor. Natural gas supplies have tightened globally as big economies have rebounded from the coronavirus pandemic. Brazilian imports of LNG have climbed to the highest on record, as droughts crimp its hydropower plants.

Supply has also been hit by a series of outages and planned maintenance. US output of natural gas, a key source of LNG supplies in recent years, has also been lower than forecast before the pandemic.

A drop in US oil production last year as prices plummeted has had a knock-on effect on gas output, which is often produced as a byproduct of crude.

Prices have risen in the US to above $4 per MMBTU, though they remain far lower than in Europe, partly because there is not enough LNG export capacity to allow traders to effectively arbitrage the difference between the two regions.

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European domestic production has also posted sharp declines, both from the North Sea and Groningen, the continent’s largest onshore gasfield in the Netherlands. That field has been forced to restrict production because of a series of minor earthquakes, and is now expected to shut permanently next year.

In total, northern European production has declined by at least 10 per cent since the first half of 2019, according to analysts.

The tight global market is creating anxiety over what will happen this winter, when demand is generally much stronger in Europe as people heat homes and offices.

In previous periods of high prices, fuel switching by electricity generators has lowered demand, but this is becoming less viable as rising carbon prices make thermal coal more expensive.

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