Fragile and Unstable Equilibrium

That’s an accurate distillation. A whole host of flows demonstrate a rough current balance of demand and supply. There are manifold endogenous and exogenous sources of instability. While many flows are huge, there are so many active sources of instability and potential chokepoints it would be foolish to deny innate fragility.

This helpful phrase is how the International Gas Union describes the 2023 market for natural gas:

Gas prices have cooled in 2023, largely due to demand-side adjustments in Europe and Asia, yet they remain above pre-covid and pre energy crisis levels. The shortage of global supply, which was the key reason behind last year’s shocks, is still there: the market is in a state of a fragile and unstable equilibrium. This cooling has been driven by demand contraction, marginal supply growth and infrastructure debottlenecking. Nonetheless, Europe’s growing dependence on LNG has rendered global gas prices increasingly vulnerable to global LNG supply risk.

Most of the IGU Global Gas Report was completed before the October 7 explosion of conflict between Hamas and Israel — with potential significant repercussions for global energy markets. In a last-minute preface, last week the IGU warned:

While Europe’s commendable rapid development of new infrastructure and efficient utilisation of existing gas networks has been critical in rebalancing the regional situation, we should not forget that it does not eliminate the lingering supply risk, as global gas supply remains just as constrained. Undoubtedly, we saw greater focus on energy security by governments, energy companies, and financial institutions, with investments in infrastructure for source diversification and alternative energy sources. This helped to establish a new equilibrium in the gas market, although it remains unstable and seems already challenged by the new conflict in the Middle East between Israel and Hamas.

“Fragile and unstable equilibrium” can also describe flows for rice, wheat (more), diesel, many semiconductors, whole categories of pharmaceuticals, and much more.


October 24 Update: S&P Global provides the following angle on potential instability in European gas flows — even with winter inventories topped off. “The Platts assessed Dutch TTF front-month contract jumped 45% to a 9-month high of Eur55/MWh Oct.13, despite near full European storage levels. This rally coincided with the start of the Israel-Hamas war, announced industrial action at Chevron’s Australian LNG facilities, alleged “external activity” damaging the Balticconnector pipeline. A series of bullish news over the Oct.7-8 weekend sparked geopolitical and supply uncertainty in an already volatile natural gas market.”