Global power shortages a primer to historic natural gas bull market

As factories are shut in parts of China and energy prices soar to historic levels ahead of winter in Europe, the world’s major economies are on the brink of a level of power instability without precedent in modern history.

The blackouts are inconvenient, but the real threat to governments is the potential for social instability.

So, make no mistake policy makers are making moves to sure up grids.

What’s now ensuing is a natural gas arms race.



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Source: Bloomberg

Why natural gas?

The surge in natural gas prices has been driven in-part by a combination of a strong COVID-19 recovery, unexpected supply restraints and adverse weather events.

As the International Energy Agency puts it:

“European prices also reflect broader global gas market dynamics. There were strong cold spells in East Asia and North America in the first quarter of 2021. They were followed by heatwaves in Asia and drought in various regions, including Brazil. All of these developments added to the upward trend in gas demand.”

But there’s another key factor in the sudden instability of global power networks, that few want to discuss.


The truth is, mandated emissions targets and pressure on government’s to green grids has created a new level of vulnerability in power networks that will likely see the power bills of consumers and businesses rise.

The International Energy Agency also notes “lower-than-usual availability of wind energy in recent weeks” as another reason behind surging gas prices.

Natural gas is widely viewed as a transition fuel in decarbonization – used to support grids that are becoming more reliant on renewables. This is because electricity generated by natural gas produces around half the emissions of coal.

Today’s extreme natural gas shortage was foreshadowed by Stanford geophysicist Mark Zoback almost exactly ten years ago in this paper.

“Natural gas is also an ideal back-up for renewable energy sources such as solar and wind because gas-fired power plants start up quickly and are much more efficient and clean than coal-burning plants,” wrote Zoback.

“But the global energy system is so huge that even if we move as quickly as possible to develop renewable energy sources such as wind, water and solar, we will need to continue using fossil fuels until mid-century.

“Remember too that over this same period the demand for energy will continue going up dramatically because of increasing standards of living in China, India and the rest of the developing world.

“We have to address the many issues associated with energy and the environment on many fronts – we need to save energy through improved efficiency; more fully utilize renewables; and develop new clean energy sources.

Perhaps policy makers should have listened to Zoback.

The cusp of an historic natural gas bull market?

China, the biggest user of coal-fired power in the world, also happens to be the biggest user of renewables – doubling the proportion of renewables in its energy mix over the past six years.

So, it may be no surprise demand for natural gas has continued year after year, over the past decade.

Alexey Miller, the CEO of Gazprom, the world’s largest publicly-listed natural gas company spoke about China’s staggering natural gas demand in a speech earlier this month. You can read the full transcript here.

“There is no doubt that the Chinese market is the most dynamic and fast-growing one, and it shows simply unbelievable consumption growth rates every year,” he said.

“The year 2021 is no exception. In the first half of the year, natural gas consumption in China grew by 15.5 per cent. The volume of imports increased by 23.8 per cent.

“This means that China’s projected consumption based on the results of 2021 will amount to 360 billion cubic meters, and the volume of imports will total 160 billion cubic meters. Moreover, the annual volume of gas imports is expected to reach 300 billion cubic meters as early as by 2023, in just 15 years. The figure is just staggering.”

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Source: S&P Global

While in China power rationing in underway, in Europe electricity prices are already spiking. Take a look at Italy, where electricity prices rose almost 20% last week.

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Today, according to Gas Infrastructure Europe, gas storage levels across Europe are at their lowest point in ten years as Government’s and industry scramble for supply.

While this has all resulted in natural gas prices in Europe and Asia tripling in the past year, there could be much more to come.

In the near-term, should the upcoming European and Chinese winter sessions pack an above-average chill, gas prices could move even higher.

However, the longer-term demand case is compelling. As global energy systems continue to transition to renewables, arguably the only option to ensure it’s done in an orderly manner is using natural gas as a grid stabiliser.

According to McKinsey we could be seeing just the beginnings of a once-in-a-generation natural gas bull market.

The consultancy firm believes there could be another 15 years of growth ahead before peak demand is reached.

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If you’ve got views on natural gas demand, leave a comment below.

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