Natural gas and power prices with Seb Kennedy (Founding Editor @ Energy Flux)

The philosophical question is, at what point does enough speculation become too much? The short term outlook for gas is that it's being driven by competing narratives.

And narratives are very important because the way that gas prices are formed on these very liquid trading hubs means that sentiment is driving the way that prices move as much as, like, the fundamentals of supply and demand. So for every molecule of gas that that that I burn at home on my stove, that molecule of gas has been bought and sold on average seventeen or eighteen times before it's delivered to me. And every participant is looking to get value from that trade, so that inflates the price. The fundamentals are bearish, because for the reasons I explained, you know, the renewables explosion in Europe and, the UK included is, you know, it's it's really kind of pulling the rug out from underneath the demand story. But on the supply side, there's huge uncertainty.

Hello, and welcome back to Transmission.

Gas prices are often linked to power prices across the globe. But what sets the price of gas? And how are increasing levels of renewable generation affecting this? This week, Quentin is joined by Seb Kennedy, founding editor at Energy Flux. The conversation covers natural gas from extraction, transportation to pricing, gas demand trends in Europe, the drivers of price volatility, and how speculation is driving market prices. If you are enjoying the podcast, please hit subscribe so you never miss an episode and leave us a review wherever you listen. Let's jump in.

Seb, thanks for joining us on the podcast.

My pleasure. Thanks for inviting me.

Before we get started, I mean, if you're listening to this, this is gonna be an awesome episode.

Seb comes from he's got his own firm, Energy Flux or Energy Flux News. And if you're on your phone listening to this, find Seb on, on LinkedIn or Twitter and check out the Substack.

This is gonna be all about gas markets. And on this podcast, we haven't really done this before in the depth that it deserves, and power markets are so linked and reliant on gas markets. And we have Sebben who knows everything there is to know about these markets and have been covering them for a long, long time. Seb, so first question, how did you get into so into this gas thing? And, why why is this your your mastermind subject?

Yes. So I I'm an energy journalist by by training and, been writing about energy since about two thousand and eight. Started off on the kind of renewables beats in the UK, and I've written for a whole host of publications and and organizations.

I spent four years at a natural gas management consultancy editing daily news feed for the gas and liquefied natural gas industries.

And then I branched out on my own and started energy flux and took a lot of my learnings about the gas markets into that publication and and that's where I I publish all of my kind of data driven investigative research into what's happening in gas markets.

And when we're talking about gas, this is just to set the record straight before we go any we're gonna go right down the rabbit hole, but we're gonna start quite zoomed out. So when we talk about gas, what are we what is gas?

Natural gas is mostly methane and it's generally produced by drilling a hole in the ground and pumping up what's in a reservoir, often mixed crude oil and natural gas and there are other kind of gases and liquids down there too. And when I was at natural gas consultancy then, I remember there was a phrase you used to do the rounds which was if you're prospecting for oil and you find gas and this is very kind of kind of macho male way to phrase it. They said, if you find gas, it was like kissing your sister because none of the oil guys wanted to find gas. Gas was worthless.

Pretty much worthless at the wellhead. Everybody wanted oil. That's where all the big margins were. And when you drill for gas, you find gas is a problem, because it's like, oh, you gotta build pipeline infrastructure.

You gotta find a market for it. You gotta have compressors and, you know, you gotta have processing facilities. And then when you get it to consumers, it's still like, the margins are absolutely tiny. So gas was always conventionally among the upstream operators seen as like a very low value, almost like a waste product and that's changed in in recent years.

So now gas is so fundamental to energy markets or just an industry or survival as a species now.

What what's the structure of the global this is a bit of a silly question, but what's the structure of the global gas market? Or what is the market for gas internationally?

Yes. So so I think the fact that it's international is is interesting because it never used to be. It used to be very much a localised market. Molecules were drilled out of the ground.

You know, they were they were sold to end consumers only as far as the gas transmission network, the pipelines would stretch. And and and and so you had very different pricing regimes going from, say, like, between North America and other parts of the world because the supply demand dynamics were very different. There was nothing connecting them. Over, you know, since the kind of nineteen seventies and we've seen a very gradual and then a very rapid increase in the trade of liquefied natural gas.

So this is gas that has been produced in the conventional way, drilled out of the ground. But instead of just being piped to consumers, it gets piped into a liquefaction plant. And this is basically a very, very big refrigerator.

And what it does is it uses it uses energy to work like a fridge to to condense and cool down the gas to about I think it's like minus a hundred and seventy degrees centigrade.

That condenses it into liquid form.

So you can actually like many orders of magnitude more gas into the same amount of space and you can you can pump it then onto a cryogenic vessel. So that's just basically basically a a big boat that has cryogenic walls on it.

And these ships are gigantic, aren't they?

They're massive. Yes. They and they've they're growing as well. They've been growing with the industry. So the ships themselves have grown as the size of the liquefaction plants have grown And of course with the widening of things like the Panama Canal, which allows bigger boats to go through. So so you can you can get it's it's very common now to get an LNG vessel that can hold, significantly more than a hundred and sixty thousand cubic meters of of liquefied natural gas.

And what's remarkable is now that you can trade now there's a global gas market for with LNG carriers, that you you can have countries and territories that have got no gas, no gas on their shores, that can have a economy that's highly reliant or dependent on gas, and that's just absolutely fascinating.

So where does the gas come from then? Around the world, if we had a if we had a if we were to start here with a globe, where would you point to as the areas where the gas comes from?

Yeah. So the and the the major ex producing and exporting regions of gas are North America, the Middle East, East Coast of Africa increasingly is producing more, Australia is a is a massive producer of of gas, although a lot of it comes from coal bed methane, which is slightly different way of getting the gas out the ground. And and Europe was traditionally a big producer of natural gas from the North Sea, but those reserves are increasingly depleted.

And particularly here in the UK, it's very much into its twilight years.

And so we should probably clarify a few things because we're gonna talk about it a lot. So when you extract gas from the ground, well, what what what's the shale thing? And what's fracking? And what's the coal bed methane?

And can you just cover a few of those terms so we know where we stand with them? Because in some areas, you you drill into the ground not too deep, and you get high pressure, beautiful sweet gas without a little sulfur in it. And in other areas you have to compress it or you have to frack it and there's lots of different ways to do it. Could we just cover the production bit in a high level first?

Because it affects production costs, doesn't it?

It does, yes. So so let's just focus on the two main sources of gas, which is like conventional reservoirs and shale gas that's procured through hydraulic fracturing. So, yeah, conventional gas would be found often mixed up with crude oil in a reservoir under the ground, and you drill a borehole into the ground and and then you you pump it up and you separate it from the oil and you treat it and then you put it through the kind of compression system and it goes through pipelines to wherever it's gonna go. Shale gas is fundamentally different. This is gas that's much more dispersed and it's it's kind of held in in shale formation, shale rock formations.

And you can't just drill a single well and pump it up because it's actually almost not really frozen, but it's kind of like a bit like Han Solo in Star Wars when he's kind of frozen in rock, you know. It's like it's a little bit like that. Maybe not the best analogy, but but essentially, it's like imagine rock with loads, loads, little bubbles of methane kind of captured in there. To get those out, you you can't drill a single well.

You have to drill down into the shale formation in more than one location and then drill horizontally and then pump down into the borehole a mixture of fluids, very high pressure, and they crack the rock. And that that fracturing, like you're using hydraulic pressure to fracture the rock, that then frees these methane and other molecules that are caught in the rock and they're absorbed by this this this liquid, I think it's called propant, and then you pump that liquid back up to the surface and you can then pull the methane out of or the natural gas out of that that liquid and process it and and then you know you you can then mix it with any other kind of gas source once you've got the kind of basic components of natural gas.

Now can we talk about some prices and some terms? So who's this Henry Hub guy?

Yeah. Henry Hub is a it's actually a physical trading hub in in the state of Louisiana, I believe. And it's a confluence of pipelines that bring together production from a variety of gas producing basins around the US Gulf Coast. And and so it's it's a place where you can buy and sell gas from different different producing regions and there's a kind of there's there's a kind of aggregate price.

So it's like a trading hub. It's a physical trading hub. But it's also kind of evolved into into a kind of a a more financialized trading hub, and you can buy, you know, futures on Henry Hub. So you can speculate on the price of gas in the future, you know, from between now, like a month's time, six months, next season, next year.

You can even trade Henry Hub into the twenty thirties. There is a price for Henry Hub today for delivery in twenty thirty two, I think.

At the hub?

At the hub.

Well we should probably figure out pricing.

So so what what's a unit of gas and well in the power markets everybody knows what a megawatt hour is, but it's a bit more complicated than that in gas isn't it? So what is a unit of gas and there's a physical element to it, geographical element, isn't there? And and then and then how is it priced?

Yeah. So so in the US and increasingly around the world, then gas is priced in million British thermal units and that's that's a function of the energy content of the gas. That changes according to location. So in in the US on the Gulf Coast where you have just this enormous supply base of shale, just they're just, you know, swimming in gas, then the gas is very cheap because there's a big supply and there's a limited amount of demand. So the price is very low. It's structurally low. So, you know, prices gas on Henry Hub is generally between, like, two and four dollars per MMBtu.

But if you go to importing regions like Europe, like Asia, well, at the moment, it's, you know, double digits MMBtu. So like ten of ten, twelve, thirteen, fourteen MMBtu.

And so that spread between the two basins is an opportunity for traders who can buy gas at Henry Hub price, liquefy it in one of those big fridges, put it on a big cryogenic vessel, float it across the Atlantic, and offload at a regasification terminal in the UK, in Europe, or on the other side of the world, in Japan, in China, and and then sell at the local price in the importing market, and then they get to keep the difference minus the cost of transportation and liquefaction.

Wow. So European gas is three or four, maybe five times the price as American shale or Texan shale. That has a big impact on the competitiveness of industry in those regions. Right?

If your if your baseload energy is so much cheaper in one area than another. Can we talk about LNG for a second? Because this LNG thing has just grown and grown and grown and especially since the moving away from Russian gas and how LNG has so Europe moved away from Russian gas for obvious reasons and American shale, the miracle of American shale just came in and plugged the gap. And it seems like LNG terminals and shipbuilding and it's it's like this this ever growing LNG world.

So how much of global gas is LNG now compared to pipeline gas? And what what are the the fundamentals or the structures are are within the LNG market?

Yeah. So it's interesting actually. If you go back about three or four years, I think, then the imagine, like, all of all the gas that is bought and sold in the world, we went from having, I guess, maybe, like, fifty five percent of it was sold by pipeline, so in its gaseous form, And then increasingly, it shifted towards LNG. And about two about about two or three years ago, then it actually tipped in favor of LNG. So now more gas of all the gas that's traded in the world, most of it, a small majority of it is sold as liquefied natural gas. So LNG is now the primary trading vector for natural gas in the world.

Wow. So, yeah, if you turn your hob on more more likely than not anywhere around the world it's been liquefied at some point.

Yeah. But not in North America because they don't import LNG. Although, of course, they were importing LNG and the Shell revolution completely turned that on its head. Like, you know, the US a lot of some of the the first liquefaction export plants in on the US Gulf Coast were originally import terminals.

The US was quote unquote running out of gas because the conventional fields were all declining. But then when the shale revolution came along, then you just had a gargantuan expansion of supply and they were like, wait a minute, we don't need to import anymore. And then some of the kind of entrepreneurial guys were like, there's enough to export here. We can liquefy this. We can export gas to the whole world. And in the space of just eight years, probably less than eight years, the US went from being a net importer of gas to being the world's number one exporter of liquefied natural gas. That's quick.

Wow. That's phenomenal. And with that comes great riches.

It does. Yeah. If you can capture that arbitrage, you know, you're buying at Henry Hub, you're liquefying for a fixed fee, and you have, you know, your your bunker fuel costs or the cost of transportation, the cost of freight, The margins on selling into Europe and into Asia now are just so absolutely phenomenal that those costs are nothing. And, you know, these companies are making hundreds of millions of pounds a year.

So now let's focus on the demand side. Let's start at the beginning. What is gas used for? Let's just focus on Europe for example. What's gas used for in Europe and how is that changing with decarbonisation?

Yeah. So there are three main demand applications for for gas. So you have your your space heating. So when you turn on your your boiler and heat up your radiators and like cooking is kind of part of that. So that's kind of residential and like commercial units that use gas for the same thing for heating. So like residential and commercial and then you have the industrial side of things, so like steel smelters.

And and gas is also a feedstock for making fertilizer.

So you have the kind of industrial applications and then you have power generation. So burning gas in typically a combined cycle gas turbine which generates electricity by using the gas to turn the turbine and, you know, produce electrons.

I guess the first thing to talk about is that when we were burning a lot of coal thirty years ago and before that, we weren't burning much gas for power generation. But now gas generation is a major part of the generation mix. And so what are the assumptions about that going forward? What does that look like in the world of decarbonisation?

Yeah. So so, yeah, the the share of gas in the power mix, it it changes, like, from day to day. It's it's it's very kind of flexible power source. So you you tend to find the gas generation ramps up when wind and solar die down, and then it will ramp down again when there's production from from renewables.

So so decarbonization and the rapid penetration of renewable variable output, renewable sources is having a major impact on the the demand outlook for for, gas in the power sector.

But decarbonization more broadly affects those other sectors too. So like heating and industrial uses of gas, they also get affected by, by decarbonization.

So obviously, the the push to electrify heating with heat pumps, with e boilers, that transfers the the the gas demand from the gas grid to the power grid. So you're gonna have more power demand. And the idea is that you can increasingly it's it's easier to meet power demand through renewables than it is finding, like, green sources of fuel, like hydrogen, to to heat your home. So the electrification of heating is also has a major bearing on on gas demand.

But, like, the power sector is where you can really see visibly just how the onset of wind and solar is affecting gas demand Because, you know, I ran some numbers in energy flux and on kind of a pan European basis, then the the amount of gas that's being burnt in Europe for power generation just on a kind of pure volume level, like the the volume of gas that's being burnt for power generation is at a nineteen year low. So it's almost like a twenty year low over the first I mean, I did I did the analysis in July. So I compared January to July going all the way back as far as I could find records for.

And the amount of gas being burnt across Europe now is a nineteen year low. We never burnt less gas over those months of the year since, you know, like before like Gordon Brown's prime minister, you know. It's like we go about quite a long time. And and and the reason for that is is twofold really.

One one is like massive onset of renewables. So like loads of wind and solar coming onto the system, just by reducing the overall need to burn gas to produce to meet like the the demand that's on the system. But also demand being lower as well. So like macroeconomic growth in Europe is not particularly strong and demand is quite low and, you know, the the need for electricity is is kind of actually quite a lot lower than it than it than it has been over over the preceding years.

So so like lower demand, more renewables means less gas in in the power sector.

What does supply and demand global I mean, this is a this is a is number go up or number go down question, which is, of course, perilous. But what do the supply and demand characteristics look like going forward then? Because we've got is is the Shell revolution still expanding? Are we getting more and more Shell?

Is LNG as a proportion of global gas getting bigger? And is demand in Europe getting smaller? I mean, what what's it generally is is your assumption around the next few years? And I wanna talk to you about volatility as well because we we should probably do a post mortem on what happened over the last couple of years and then what we expect the the fundamentals of the gas markets look like going forward.

But let's start with supply and demand. So is Europe generally gonna be consuming less demand going forward? And is the US generally gonna be exporting more shale?

On the macro level then, arguably, yes. So, you know, the US has it went from a standing start in twenty sixteen to being the world's number one LNG exporter on the basis of, like, massively almost infinitely expanding production of shale gas. And they plan to double again the total amount of liquefaction capacity, their ability to export gas to the world over the next sort of six, seven, eight years, which is just absolutely gargantuan hockey stick curve of of, export capacity. And that's all predicated on the basis that the shale basins will just keep producing more and more and more and more cheap gas.

And there's there's a bit of a debate around whether that's a credible assumption to make because, obviously, it is a finite resource. But at the same time, innovation has always surprised, us. You know, humanity's ability to get more out of less is is just seems to be almost bottomless and that's why we have so much shale gas in the first place. So it's kind of an open question, like, how much more productive can these shale basins be?

And, you know, the the the guys who want to invest in the liquefaction plants are banking on them being extremely productive for, you know, because these plants have like twenty, thirty year economic life. So you're banking on the gas being there to to to actually put into the big fridge and then liquefy and export it at all. And then in the importing regions then, yeah, you've got Europe which is demand growth is incredibly weak because Europe is, you know, on a kind of very broad basis of leading the energy transition. So trying to, you know, use less fossil fuels, use less gas, produce more renewables.

You know, so demand for gas is, in theory, on a kind of like a downward trajectory in Europe. Although it's it's a very bumpy bumpy outlook, at the moment because, you know, wind and solar do need flexible power sources to to balance out that variability in supply. So, you know, like gas will be very much a central part of the European economy for a very long time. But on a kind of like macro level, then the demand outlook doesn't look particularly strong, the growth in Europe.

Whereas in Asia, they're still using huge amounts of coal and displacing that coal from those economies is in theory an opportunity for gas to you know come in and be like a kind of cleaner power source, a cleaner feedstock for for for, like, the economic needs of what is like the the world's most rapidly growing region is like kind of like Southeast Asia. So, like, that's what all the economic growth is. And so the gas industry is really banking on Asia as being the big growth engine, particularly for LNG exports because Asia is kind of structurally short on gas. They're they're not big producers of gas and so they need to import the gas from somewhere.

And so the the the kind of investment case, if you like, in LNG is based on there being big growth story in in Asia.

Let's talk about volatility because the I mean this winter just gone thinking through the the lens of the power market in Great Britain and Europe, There's been suppressed power baseload power prices now for a while. This winter was fairly mild, but we we saw a couple of gigs less peak demand on the system. Yeah. I think the the market's been quite surprised at how little volatility there's been in gas markets.

And, essentially, it's gas and carbon that sets the still sets the price in power markets in most of Europe. And so my question, if you can pull out your crystal ball, is is the volatility coming back in gas markets, and therefore, will it come back in power markets?

I'd say probably yes because what's happening with the the kind of the the short term outlook for gas is that it's being driven by competing narratives.

And narratives are very important because the way that gas prices are formed on these very liquid trading hubs means that sentiment is driving the way that prices move as much as, like, the fundamentals of supply and demand.

So the like, the kind of the fundamentals are bearish because for the reasons I explained, you know, the renewables explosion in Europe and, the UK included is, you know, it's it's really kind of pulling the rug out from underneath the demand story.

But on the supply side, there's huge uncertainty because, obviously, Russia's invasion of Ukraine saw a massive decrease in the amount of pipeline gas coming from Russia, into Europe, which was replaced by liquefied natural gas.

And in fact, the last remaining entry point for, for for for Russian gas into the EU through Ukraine is going to be shut on the first of January twenty twenty five.

So That's so so there's this there's this place called Sudza, which is actually in the Kursk region of of southwest Russia.

And at the moment, but but right now, we're recording on the fourteenth of August. And I think that the Ukrainian forces have actually in they've mounted a military incursion into Russia, and they're occupying parts of Kursk and they're occupying the region around the Sudsir, gas metering station and the compressor station where the gas goes from Russia into Ukraine and onwards into into the EU. So Russian gas on the whole used to meet around about half of your of European gas demand through the Nord Stream pipeline under the Baltic Sea and through other routes through Poland, plus the routes through through Ukraine.

The Nord Stream pipeline was taken out through through an explosion in twenty twenty two, which was just, we've got to make a film about that because that was just unbelievable. The the detonation of a subsea explosive device on a massive subsea gas pipeline, Unbelievable. That took out that pipeline and Russia also, chose to stop exporting gas to Europe through, pipeline that goes to Poland and a lot of the euro the the the Ukrainian gas transits have stopped. So what remains of Russian gas comes into Europe through Ukraine, through this Sudsir point where there's like a lot of conflicts at the moment.

And there's another pipeline that goes into Turkey under the Black Sea that's called the TurkStream pipeline.

So Europe's still buying gas through Ukraine from Russia?

Yeah. But it's only about five percent of total European imports of gas or consumption of gas I should say. So about five percent of Europe's gas comes through from Russia through Ukraine still. And they're actually, you know, lobbing grenades at each other, over the top of this compressor station, which pumps the gas from Russia into the Ukrainian gas transit system and onwards into Slovakia, Austria, and the rest of Europe.

Wow.

But it's only five percent. And when the Russian forces were kind of propelled and the Ukrainians took control of this compressor station then, the markets went crazy because they thought we're gonna lose this supply. And so, the price of gas on, like, the main European gas trading hub, it it it lapsed by, you know, about ten or fifteen percent, even though we're only talking about the loss of five percent of all of Europe's gas supply.

So so this kind of speaks to the the problem that we have with these very liberalized trading arrangements in Europe for gas, which is that they're very much driven by sentiments. And we also have this other problem, which is, I would argue, excessive speculation on the future price of gas. One of the pieces I've been digging into a lot in energy flux recently is how much speculation is there in the gas price?

Okay. What what what does speculation mean?

Okay. So speculation is essentially financial investors who do not physically deal with gas. They don't handle gas. They don't they don't produce gas.

They don't have end supply agreements with consumers of gas. They're not utilities. They're just, you know, money managers. They come in.

They take a financial position in the gas market and they place a bet on is the mark is the price gonna go up or is it gonna go down? And they do that by going long or going short. So you can buy these futures contracts on the the main trading hub which is called it's called the TTF. It's the Dutch title transfer facility.

And it is by far the most liquid trading hub in all of Europe and it's the benchmark for that region for that reason because so much gas is traded on TTF that it kind of sets the price across the whole of Europe. Okay?

A bit like the Henry Hub but in Europe.

Yes. Like Europe's Henry.

In the Netherlands somewhere.

Yeah. So it's it's a well, it's they're physically settled contracts but it's a virtual trading arrangement.

And the the the fact is you can roll over your exposure on DTF from one month to it to the next. So that means that you can speculate.

So you never have to take delivery of the actual cargo or the the actual gas.

Right. So that that allows you to speculate on the future price because you can take positions, roll them over, close them out. And with all the volatility that we've seen, all the changes of the the supply and and demand that we've seen because of Russia's invasion of Ukraine, then these massive spikes in price are just like massive money making opportunity. If you can come in and you have big big pockets, deep pockets, and you can, you know, take positions on the future price of gas worth, you know, millions of euros, then you can, you know, double, triple, quadruple ten x, twenty x your your money depending on, like, how you how you how you kind of manage your risk and how you calculate your kind of on ramp and your off ramp.

And I I think that, like, certainly from the conversations I've had anecdotally then there's, my understanding is there's a lot of US hedge funds and Asian investment funds coming in just taking purely speculative positions on t t f, you know, betting that the price will go up or go down and then closing out those positions, extracting all the profit and repatriating it for their clients.

And I've got some figures about just how much speculation is going on and I think you find it quite surprising because if you look at the amount of speculative contracts that are traded on t t f, the current rates of about your forty euros per megawatt hour for units of gas in Europe, then there's about twenty five billion euros of speculative capital sloshing around in the gas futures.

That's a lot of money and and like it, the speculative component of t t f, it it's it just absolutely dwarfs the amount of actual physical gas that's being bought, sold, and piped through the Netherlands.

So if you'll if you'll bear with me But don't don't it before we jump into that, don't they provide a market service?

Aren't they liquidity providers?

Yeah. They do. So I should probably let me rewind a bit. Okay? I'm not like some anti market zealous.

Yeah. Yeah. Right? I don't I I'm not like I don't I don't think old markets are bad and speculation is bad.

It's like it's it's almost like a philosophical question.

So, yeah, speculation speculators come in and they they provide liquidity. And I'll be the first one to acknowledge that the most volatile market is an illiquid market. Yeah. One that doesn't have any speculation whatsoever and it's purely based on like the physical traders. They tend to be very volatile markets.

But the the philosophical question is, at what point does enough speculation become too much? And there's no real clear answer around that, but I would I would kind of posit that the situation that we have around speculation on TTF is so phenomenally large that we've gone from the enough place into the too much space.

Infinite bid.

Well, I don't know. What what is infinite bid? What is that?

I guess it's just a a wall of money that, that that prevents prices going below a certain price.

Yeah. I mean, you get a lot of herding behavior. You know, you got you got like big capital coming in and moving the markets because it's gone from a point where speculations just provides a service, provides, you know, a willing counterparty to somebody who's trying to manage their risk. You know, so you're a utility.

You you want to lock in your prices next year and not be exposed to the vagaries of what's happening with the the wider market. You can, you know, you can go short in twenty twenty five because you've got, like, length on your books now. That's very that's a genuine risk management and that's a genuine trading. But the great thing about European regulations is that we know exactly how much trading is quote unquote genuine by, like, risk management entity and sees who are managing their risk And how much of it is purely speculative because there's a there's a transparency obligation placed upon traders on TTF to disclose their net positions.

So every week, we know how much or how much traders have gone long and how much they've gone short, what the net position is, and how that changes week to week. So we can monitor whether the market is, you know, could become increasingly bullish or is becoming bearish based on the way that that twenty five odd billion euros of speculative capital is positioning itself, is sloshing into long positions or out of short positions.

And I've got a feeling you're about to pull out some numbers.

Yeah. I I don't go into that in my trusty journalist notebooks. I did I've got some figures for you.

Alright. Let's let's do the figures.

Yeah. Okay. So TTF speculation. So so you can you can you can look at, like, the amount of contracts that are open at any given time. That's the open interest on TTF.

And if you're listening to this and not watching, Serge just pulled out a very pretty little notebook with some scribbles in it, which we're rather we're rather excited to see what's in there.

Yeah. So so if you let let's imagine you got your open interest. Right? That's like the the kind of the the amount of people who are bidding in the market, like bids and offers.

And it's normal in a in a commodity market for that to be on in terms of like the volume of the commodity greater than the amount of underlying physical commodity. It's normal. Like, you you wanna have a bit more speculation than there is actual supply and physical demand of the stuff. Yeah.

Because that that's what allows you to have liquidity.

So in, like, the like, we've we've got various, like, hubs, trade regional trading hubs around Europe. Well, there's the PSV hub in Italy. There's the PEG, the PEG hub in France. There's the NBP, National Balancing Points in the UK. These are all like re like regional local gas hubs. They all have between one and three times as much liquidity in the financial markets, the financial instruments as they do the underlying commodity.

K. So like one to three times, let's say, for every unit of gas that's bought and sold in the UK, about three units of gas traded on m b p. Right? And in Italy, it's about one or two whatever.

On the t t f, it's nearly eighteen times.

It's eighteen times more liquidity on the hub than there is gas actually being traded. And that's more than any other commodity I could find. So in like coffee, for example, you can you can like trade coffee futures on the international in on the intercontinental exchange, which is the major one of the major exchanges, you can trade robust coffee futures type of coffee. It's about two times open interest.

On the London Metals Exchange, you can trade futures in tin and aluminum and there's about five times open interest. On Brent, you know, Brent's like the benchmark crude, it's fourteen times open interest. And well, the interest is so open interest is fourteen times the underlying commodity. On TTF, it's eight nearly eighteen times.

So it's like you could say you could you could say so for every molecule of gas that that that I burn at home on my stove, that molecule of gas is being trade bought and sold on average seventeen or eighteen times before it's delivered to me. And every participant is looking to get value from that trade, so that inflates the price.

And we can actually even measure the extent to which the speculation is is influencing the price.

But I just so I don't know whether so I'm really glad we're having this conversation. I just don't know whether that's a good or a bad thing because because it so that the the the I think the assumption is that it's like a zero sum game, right, which is that every transaction that happens on top of that base unit of commodity is a is adding to a is is adding up to a premium on it. Right? I think it's it's increased the cost to the general end consumers, the idea.

But I guess if you think about financial products, say, you think about the derivatives market in in equities or and the biggest market in the world, the bond market, and all everything around that, you'd probably find that the how do you define also defining open interest is a very difficult thing to do. Right? But you'd probably find that though that there's an equal number of nonphysical transactions or volume, maybe even more on those markets. And is that a good or bad thing?

I don't know. I don't know.

I mean, like like I said, like, there there there is a healthy amount of speculation.

But but it's not just about, like, how much open interest is there because the regulations allow us to see of that total open interest, how much of it is purely speculative and how much of it is being undertaken by the genuine physical players who need to hedge their risk, who need to hedge their exposure.

So the Dutch gas market and this is all figures from the European Securities and Markets Authority. And they issued a ruling recently which had all the figures in it, and I'm just quoting from that. So the Dutch gas market, the size of the market is a hundred and sixty seven terawatt hours per year. That includes all the gas that's being produced domestically, the the the pipeline gas coming in, going out, and the amount of LNG cup that kind of comes in through to the Netherlands through these regas regasification terminals, hundred and sixty seven terawatt hours.

The total open interest on TTF is in the region of two thousand eight hundred terawatt hours. That's where that seventeen eighteen x figure comes from. You divide one by the other, there's like eighteen times more gas open interest on TTF than there is of like the physical gas under underlying. So two thousand eight hundred terawatt hours, Of that, six hundred and forty terawatt hours is purely speculative.

So the funds holding that those contracts of the total up to six hundred forty terawatt hours are purely speculative traders. They are only in it to make a profit. Six hundred and forty terawatt hours times the going rate on t t f about forty euros per terawatt per per megawatt hour gives you the twenty five billion speculative capital components of gas trade happening on the European benchmark gas trading hub. Now we can see, like I said, like how that positions itself.

So of that six hundred and fifty six hundred and forty terawatt hours, you can see how much of it is in long contracts, like speculating on the price going up, how much of it is speculating on the price going down. And if it's kind of more or less even then, you know, it's kind of like everyone is the hedge funds are hedging their bets if you like that. Yeah. Then it's they're not pointing in a direction.

But the problem I was gonna ask you about that.

Yeah. I mean, some of this must be hedging positions by taking out contracts just to hedge just end of day or whatever, to make sure your risk exposure isn't too too big. So you could end up double counting a lot. Right?

Yeah. Yeah. So so this this counts all positions.

Right? All positions net?

No. No. So I've I've add for for this six hundred and fifty terawatt hour, that's just, like, all of the positions added together. So the amount of speculative capital moving in the markets, some of it's long, some of it's short. Right?

What what happens is that when of that kind of six hundred and forty or terawatt hours, if it if it goes, like, significantly net long, then you will see the price going absolutely crazy up Mhmm. Racing for the ceiling.

And then same thing, like when it goes net short, like significantly net short, then, you know, that precipitates a massive drop in the price. And you can actually analyze I've done regression analysis in energy flux. So what what regression analysis is where you you analyze the you can actually quantify the relationship between two variables. So you've got movement in speculative capital and movement in price on the hub.

And I've over like the last ten months, you can kind of get them side by side and you can you can quantify the correlation. I did this first in May. So for the ten months leading up to May there was a fifty three percent, correlation between the movement of speculative funds and movement of prices up and down on TTF. I did it again last week and it's now sixty three percent.

Sorry no it was fifty six percent in May, sixty three percent. So it's going up. So as more speculative capital moves in to t t f and takes these purely speculative money making positions on the hub, then they are accounting for a greater proportion of the movements that we are seeing in the price of the actual gas itself. So I would say that speculation is becoming a great moving factor in the actual price of the gas that is being used in the energy system.

And so so what does that mean? What's the what's the impact?

The impact is more volatility. It means that because a lot of these I'd say a lot of these hedge funds and a a lot of of of, like, organizations that are investing in TTF futures just to make money, they're, you know, they're all powered by like big data algorithmic trading. They are extremely attuned to geopolitical events. And so so it's all about, like like I was saying about sentiment.

Sentiment drives pricing. When you have a huge speculative component within the trading of any commodity, then then it it's it's like what you're doing is you're you're bringing the the perception of the future into the present price formation. So so you have all this this kind of speculation about where prices are gonna go in the future, which nobody can really know with any certainty, influencing how prices are being formed today. And so that's why you see these kind of really outsized movements on TTF because they are extremely attuned to, like, minor changes in what may or may not happen in the future.

So that's why, like, when when five percent of Europe's total gas supply is pose is is at risk of, you know, being cut off six months early because of, you know, Ukraine's incursion into the Kursk region of Russia, you see the gas price rising by double digits. It doesn't make sense because you're only talking about five percent of supply that was already going to be lost in six months' time, less than that, five months now. And yet, it still manages to move the market double digits. The only way I think you can explain that is because you have this twenty five billion euros, respect this is capital betting on where the price is going and this herding behavior where, you know, if you're a hedge fund and, you know, you see twenty four point nine billion euros of of of of capital betting that the price is gonna go up.

You're gonna do the same thing because otherwise you're betting against that.

And and it's like a self fulfilling prophecy. When all the traders take positions, then they have this influence on the price itself. So it's very much easier to to kind of just jump on the roller coaster, go for a ride up the TTF train and make a lot of money on the way. And that's what we're seeing, like these geopolitical events are having outsized impacts on the price of gas because nothing has actually changed to the physical supply of gas in Europe.

And and it's the same with the Middle East. Right? So I've talked about Qatar earlier. Qatar is well, too recently was the world's number one exporter of liquefied natural gas.

It's now narrowly in second position but it's still like a massive supplier of natural gas. All that gas comes out the Persian Gulf. It has to go around the Strait of Hormuz which is a very narrow waterway between, that it goes like the very shallow waters just by Iran. And so it's very very, it's it's it's like choke points in transits.

And all of the liquefied natural gas that come down to Qatar has to go around the Strait of Pormuz and it's always whenever there's, like, geopolitical flash points in the Middle East, everyone worries about, is the Strait of Pormuz gonna be cut off? Are we gonna have this kind of choke hold by, like, gunboats stopping commercial freight from leaving the Persian Gulf, which would obviously impact oil exports from Saudi Arabia, from Kuwait, etcetera?

And and what's really, really fascinating is that when we've seen tensions become extremely heated in the Middle East and the geopolitical tensions rising and speculation about hormones becoming constrained, you've seen the gas price in Europe rising.

But at the same time we don't see the same phenomenon happening in in oil price even though like, you know, what is it about a third of the world world's crude oil is exported through the Strait of Hormuz. And so it's kinda like well, so the gas market thinks that it's gonna get constrained or it could get some constraints. So we're paying a war premium, you know, or the Hormuz premium is manifesting on TTF because everyone's speculating that it could happen and so therefore prices have to go up. But at the same time, oil markets are not pricing in that same premium.

So something doesn't add up. Why is geopolitics a bullish driver in gas but it's not a bullish driver in crude? It doesn't make any sense. So my argument is that the speculative component on ETF is just out of control and it doesn't actually reflect the kind of it just it just lost any connection with the fundamental supply and demand balances that should be governing fundamentally how prices are moving any given moment.

Interesting. So you heard it here first.

Look at it this way. Right? So the the the price on ETF hit a low of twenty odd euros per megawatt hour in February. It's up seventy five percent since then.

What's actually changed in the supply demand balance of the gas market to justify seventy five percent increase between February and August? Nothing has changed.

If anything, like I said, of looking at how much gas is being burned in European power sector Demand's reducing.

It's like a twenty year low. And yet we're paying seventy five percent more for wholesale gas. Why?

So let's let's talk about storage for a second.

Where do we even start? How how is gas stored apart from liquefied natural gas in on ships? How is gas stored in Europe?

Yeah.

So gas Europe has the world's biggest underground gas storage capacity, and it it it's it's it's massive. It it it can hold enough gas to cover European demand for months on end. And the level of storage is also like when you look at the kind of fundamental drivers like supply and demand also, the amount of gas held in storage, that's a massive driver of price as well. And we've got this situation where Europe has been filling gas because it got caught short in twenty twenty one because of all the manipulations of market happening, because of Russia's pre invasion preparations.

It got caught short. They brought in regulations. Now gas has to be filled to, I think, eighty percent of capacity before the end of the gas year. So on the first of November, I think.

I might have to check that. But yeah. So in the autumn when, like, the you go from the refilling period to the withdrawal season, on an aggregate basis, all of the storage facilities need to be eighty percent full across all of Europe. And they are well in excess of that already.

Well, Europe is doing so well filling its gas storage facilities over the course of the summer when demand is low and prices are low that, you know, we're gonna be reaching what's called tank tops pretty soon.

Tank tops.

Tank tops. Yeah. No. Not the not the not the other kind of outdated fashion item.

It's when the gas is at the top of the underground storage tank and you can't get anymore in. That's when it's full. So when you hit tank tops, then suddenly Europe has literally nowhere to put the gas. And we're on course to do that like in early autumn.

Oh, wow.

And when that happens then, you know, when the LNG vessel docks rocks up in, like, the Bay of Biscay and it's got a whole cargo to unload, if you're at tank tops, then it literally have nowhere to go and you have got to hold it on the ship. And that's a problem because the gas in liquefied form boils off.

So it it we're gonna see more and more of this because we're gonna have a huge increase.

And so then if you remember at the start of this, I talked about the United States doubling its liquefaction capacity. So the amount of gas it's putting on the water is going to double in the coming years against a fundamentally kind of bearish outlook for demand and Europe getting to tank tops earlier and earlier in the year, then you're gonna have these situations where, you know, there's nowhere to actually put the gas. You have end up using the vessels themselves as floating storage. And and you can see there there are you can you can see about how much gas is being held on the water, how many vessels are being used as floating storage at any given moment.

And I expect that we'll see more and more periods where you're seeing quite large volumes of gas being held on the water because it kind of has nowhere to go or the traders, they're kind of banking on the price, you know, rising. They're being a bit of a what's called the kind of the the like floating arbitrage. So you kind of float the gas into a more expensively priced month and sell it to get a little bit more money or maybe cut your losses even if the price goes really low. So we'll see more of that happening.

So you've got you've got demand destruction essentially via, well, deindustrialization in many parts of Europe and electrification and renewables.

And then you have this the the storage tanks, tank tops, that's one new favorite word. And then you have lots more LNG, in fact, a doubling of LNG capacity coming out of share out of the US in the next however many years. And so the picture surely then for Europe looks like one of oversupply.

Yeah. Yeah. It is. And and also, like, Europe has has has massively increased the amount of regasification capacity because one of the constraints after your after Russia's invasion of Ukraine and the the loss of pipeline gas from Russia was that we actually couldn't get enough gas into Europe quickly enough of sorry, get enough LNG into Europe. But one of the bottlenecks was infrastructure.

So the amount of there's only a certain amount of gas you can re liquefy at any given moment and that's a function of how much regasification capacity you have. So one of the strategic decisions that was taken in the wake of the loss of Russian pipeline gas was to go on this massive regas capacity building spree all around Europe. And Germany went from having no regas terminals to having I think they've got three now and there are more in development.

And and so so you've got this kind of huge increase in the ability to to import LNG, which means that as European gas the the the the underground storage of gas becomes full, then you kind of outsource the storage requirement onto vessels. And you can, like, kind of just moor them around.

And then when the gas feeders of vessels coming over the Atlantic full of gas.

Yeah. Well, they called it an armada. You know, this is kind of like this kind of this thing going around, like, the US saved Europe again. You know, this armada of LNG vessels going across the Atlantic. So and you could see it on satellite images, like this stream of of of gas laden vessels heading towards Europe to to to to kind of refill those depleted gas stocks.

We should probably come to your contrarian view. I mean, if you've got anything to plug, I'm assuming it's your substack and we've plugged that for you as well. Is there anything else you'd like to plug?

Yeah. So definitely, like, please head on over to w w w dot energyflux dot news or just Google energyflux news and you'll find me. But I I don't just do gas. I don't just do energy flux.

I am involved in another project and it's called e forward. And this is a really really exciting total change of pace by the way. This is a really exciting energy transition membership community. I'm a contributor to e forward.

I write, a lot of their, news analysis articles. But the really cool thing about e forward is that it's Yeah. It's a group of of energy transition professionals in the UK from across the energy space and they meet up every quarter. They have these in person events where they they debate and thrash out some of the the the biggest challenges facing the energy transition.

I'll be really privileged to speak at the first three events in Aberdeen, and then we've got one coming up in September in Edinburgh. Awesome. And it's very cool. So if you want to get involved, then I'd ask invite your your listeners to go to e forward e f w d dot energy and check it out.

Wicked. Yeah. We'll check that out. Now is your contrarian view. What do you believe that probably most of the world doesn't believe?

So I I've come in for a bit of stick on energy flux by pursuing this speculation story and sort of questioning whether this is really healthy and good for consumers. So I think I think I set up my contrarian view in the conversation which is that I think we've kind of crossed that is specul is there enough speculations to too much speculation place? And there's no there are not many outlets or really any news outlets that are asking that question or even taking that position. And, it's not not a very popular one. And there are a lot of kind of mainstream business news outlets that seem quite happy to carry sort of credulous commentary and analysis about, you know, all gas scarcity. We're gonna be like scarce of gas that justifies the price rises.

So my contrarian view is that I take the opposite view.

Interesting.

Yeah. I mean, I wish I had an opinion on it, but I just don't. I don't definitely don't understand it enough.

And I have my opinion.

It's fine. Okay.

I wanna be sitting on the fence about this one. Although, I trust you've done your work and the numbers are phenomenal. Seb, wanna say a massive I've just noticed your green socks, actually. They're they're lovely.

You're you've got a Seb sat here with cacti on his socks. Looks like you've been to to the Permian Basin. Seb, wanna say a massive thank you for coming on the podcast. That was awesome.

We'd love to have you on again and talk talk more about and we we didn't cover much. We covered everything, but not in much detail. And maybe we have you on again if you're up for it sometime in the next year when there's some sort of big gas event, and we can find out what really happened.

I would love to. Thanks for having me.

Thanks, Seb.

Thank you for listening to Transmission, a MODO Energy podcast. Transmission delivers conversations from industry leaders and experts exploring energy markets and the operations and technologies related to grid scale battery energy storage. Check out our other episodes by searching Transmission wherever you get your podcasts.

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