Global gas and liquefied natural gas (LNG) markets remain volatile as the supply and demand imbalance deteriorates. The Russian curtailment of gas flows to Germany and other European countries has restricted supplies, which have contributed to higher European gas prices. The European gas benchmark Dutch Title Transfer Facility (TTF) month-ahead gas price has gained more than 500% compared to a year ago to reach a high of €185/MWh on September 23, 2022. In the U.S., while the price of Henry Hub natural gas is below the TTF, it has more than doubled compared to long-term averages. The surge in global gas prices has spilled over into several other markets like refined products and ammonia causing economic woes for both households and businesses.

As winter approaches, the global gas market remains under pressure. Europe is competing with Asia for available cargoes in an historically tight LNG market. TTF futures are trading at a premium to Platts Asian Japan/Korea Marker (JKM) prices, which reflects regasification capacity constraints and bottlenecks in Northwest Europe. In addition to the Russian supply cut, drought conditions continue to challenge alternative power generation sources and fuel this bullish sentiment.  Hydro reservoir levels have fallen, and the effects of lower river levels have limited coal deliveries. In addition, scheduled and unscheduled nuclear shutdowns in France have exacerbated the tight gas supply situation.

Chart 1: TTF gas remains the price leader

In the U.S., the situation is less extreme than Europe though the natural gas market remains tight. While U.S. production levels continue to set record highs, inventories remain below the seasonal average amid strong air conditioning demand in a hotter-than-expected summer.  Natural gas deliveries to U.S. LNG export terminals, approximately 11 bcf/d, represent a significant demand driver, and are poised to increase when the damaged Freeport LNG facility resumes partial production in early-to mid-November 2022.  The U.S. became the world’s largest LNG exporter in the first half of 2022 with the Cheniere facilities producing 11%1 of global LNG.  Based on DOE data, U.S. exports reached 300 bcf in July 2022.

Historically, Asian markets were the primary destination of U.S. LNG cargoes. However, the trend has recently reversed with Europe currently receiving significant quantities of U.S. LNG exports. According to S&P Global Commodity Insights, France remains the top destination of U.S. LNG for the second month receiving 15 cargoes in August, followed by Spain with 10 cargoes, and South Korea and the Netherlands each with eight. The surge in exports to Europe in recent months shows the unique flexibility of the contractual framework of U.S. LNG projects, which allows cargoes to be redirected in response to global price changes.  Exporting to Europe is more profitable than exporting to Asia.

Chart 2: Europe – a key destination for U.S. LNG

The increasing impact of natural gas on refined product markets

The tight global gas market is spilling over into the oil sector, elevating the cost of production, and adding to growing demand when inventory is already low.  

Oil vs. Natural Gas for Power Generation

In the summer of 2022, the prices of TTF and JKM futures climbed well-above diesel values on a BTU-equivalent basis. They have been above liquefied petroleum gas (LPG) and very low sulfur fuel oil consistently since the prior winter.    Historically, global gas prices have tended to exceed oil values only during short periods of time, usually in winter and not summer.  With extreme cold, the demand for natural gas for power generation and direct heating can exceed the supply or infrastructure to deliver it.  LNG and natural gas prices escalate, incenting power generators to switch to other fuel sources to meet their generation needs.  This phenomenon has also occurred briefly during sharp downward price corrections in the crude oil complex.   

The link between natural gas and oil products creates both challenges and opportunities for firms and traders.  The early move in TTF and JKM futures above diesel values is expected to have a larger impact on oil demand, with fuels like diesel, LPG, and fuel oil meeting baseload rather than peak power demand.  S&P Global Commodity Insights and other industry experts estimate high LNG prices will drive incremental oil-related demand for power generation of 500 to 600 thousand barrels per day during the upcoming winter.   CME Group’s benchmark oil and natural gas futures and options products are useful tools for managing increasingly volatile markets and the interplay with other key energy benchmarks.

Chart 3: TTF gas more expensive than diesel and propane

Elevated Refined Product Cracks

The nearby 2-1-1 NYMEX futures spread has been trading around $37 in the fall of 2022, a $20 per barrel premium to historical average.  The 2-1-1 crack is a proxy for refinery margin - the spread between one NYMEX Heating Oil contract and one NYMEX RBOB contract versus two contracts of NYMEX WTI.  

Chart 4: Refined product cracks rise on high natural gas

While there are several reasons cracks have been wider this year, natural gas is on the list.  Natural gas is a key input for refineries, fueling units and producing the hydrogen required for some chemical processes.  With the Dutch TTF futures price near €185 per MWH or $61 per MMBTU, the input cost of natural gas for a typical European refinery is running at $16 per barrel, up from a more historically normal level of $3 per barrel.   Based on this, and all else equal, refined products should price $13 per barrel higher than normal vs. crude oil, just to cover the incremental cost of natural gas in their production.  

Natural gas and its role in ammonia

Natural gas is at the core of the ammonia supply chain. In 2021, according to the IEA, approximately 70% of ammonia production came from natural-gas-based steam reforming – known as grey ammonia.  This makes up roughly 20% of industrial demand for natural gas or 170 bcm. 

The higher price of natural gas is driving volatility in ammonia prices impacting profitability for producers and consumers, particularly in Europe.  Trading sources believe that the fertilizer industry consumes about 90% of the ammonia produced globally and therefore provides a key link between natural gas prices and the agricultural industry.

Chart 5: Global ammonia prices remain high on bullish demand outlook

Looking ahead, demand for ammonia as an energy fuel is expected to grow significantly as more countries move towards their net zero carbon emissions. Shipping and power generation are the two key sectors that may use a growing volume of ammonia. By 2050, ammonia is expected to reach around 29% of the demand, analysis by S&P Global Platts suggests. 

Chart 6: Power generation and shipping – new demand sectors for ammonia

Ammonia is widely seen as a viable hydrogen storage option and an effective way to remove some of the geographical limitations that exist with hydrogen due to the high cost of shipping it. Ammonia can be shipped at a temperature of -33 degrees in liquefied form compared to a temperature of over -260 degrees for pure hydrogen, which makes ammonia a potentially globally traded product. 

Ammonia market starts grey but blue beckons

Natural gas remains core to the production of more carbon-friendly ammonia types.  Blue ammonia is broadly the same as grey but includes carbon capture, which can reduce emissions by more than 90%. Carbon capture and storage will have to be more widely available at scale for blue ammonia (and hydrogen) to expand its role significantly.

Longer term, the energy market is exploring further opportunities in so-called green ammonia, produced by water electrolysis powered by renewable energy

Asia and Europe are expected to play a significant role in the demand for ammonia, in part to support the development of hydrogen-based markets. Countries with high carbon industries are expected to be at the forefront of future developments where governments have committed to net zero carbon emission targets.

The high price of natural gas is prompting further debate about the role that hydrogen may play the longer-term replacement for some natural gas. Questions remain about the make-up of that hydrogen and how much of it will be low carbon green hydrogen compared to more natural gas-based solutions like blue or grey hydrogen.   

Winter outlook uncertain

As of late September 2022, global gas prices have fallen from their August highs, and some market experts have softened their bullish stance on winter pricing.  But much uncertainty remains:  the outlook for weather, geopolitics, and the state of the economy all can contribute to volatility in natural gas prices. These factors can have a knock-on effect for oil and ammonia/fertilizer traders to keep an eye on.  The futures and options markets are expected to play a significant role in the pricing and risk management for commercial and non-commercial firms as they negotiate a pathway forward over winter 2022 and in the longer term.   


  1. Cheniere Earnings Presentation 2Q 2022

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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