“Sky-high [natural] gas prices…”

Reader JohnH* quotes Politico

EU officials attack Joe Biden over sky-high gas prices, weapons sales and trade as Vladimir Putin’s war threatens to destroy Western unity.

“The fact is, if you look at it soberly, the country that is most profiting from this war is the U.S. because they are selling more gas and at higher prices, and because they are selling more weapons,” one senior official told POLITICO. ”

While the quote is taken verbatim from Politico, it is not clear to me that natural gas prices are sky-high in the European context. Here are data for US natural gas futures (blue line) vs. Dutch TFF futures (green line).

Figure 1: US natural gas, USD/MMbtu, (blue, left scale), and TTF natural gas, EUR/MWh (green, right axis). Source: Tradingeconomics.com, accessed 11/29/2022.

Prices are quoted in different units (Eur/MWh for TTF, USD/MMbtu for US), so a direct comparison is not possible. Still one can see TTF prices are much below what they were earlier in the year (although much higher than they were two years ago).

What about LNG. Here, as I’ve noted, markets are segmented because of capacity for transport and for conversion from liquid to gas form. EIA notes for the week ending 11/16:

International natural gas futures price movements were mixed this report week. According to Bloomberg Finance, L.P., weekly average futures prices for liquefied natural gas (LNG) cargoes in East Asia decreased 85 cents to a weekly average of $27.06/MMBtu, and natural gas futures for delivery at the Title Transfer Facility (TTF) in the Netherlands, the most liquid natural gas market in Europe, increased 15 cents to a weekly average of $34.10/MMBtu.

Is this to be expected (as opposed to whether this is a “good” or “fair” outcome)? I’d say yes, given what we know about the market (see this post). The quote in the post is from Loureiro et al. (2022):

…[T]his study conducts growth convergence testing and clustering analysis on a panel comprised of four established gas price benchmarks and two emerging ones that expand up to the pre-Covid-19 period. The most significant finding is that no gas price convergence can be found outside Europe. This is despite the existence of episodes of partial convergence that are identified in the literature, and replicated and explained here. Importantly, the results strongly reject the postulate that increased LNG flows serve as a price-levelling arbitrage mechanism.

Once one sees the relative magnitudes of flows a few years earlier, one can see why price equalization would be unlikely.

Source:  Loureiro et al. (2022)

* If you were wondering, yes, this is the same JohnH who has trouble determining where median real earnings data are located, what ONS data is reported, and doubts Ukrainian moves to take Kherson.