Russia-Ukraine conflict drives up natural gas and methanol prices

The intensifying Russia-Ukraine conflict has dealt a severe blow on global market. Several countries are stepping up the sanctions against Russia in financial sector and the sanctions could reach energy sector. As a result, crude oil and natural gas prices spike recently. On Mar 3, Brent crude oil futures soar to $116/bbl, new high since Sep 2013; and WTI crude futures advance to $113/bbl, refreshing decade-high. European natural gas price spiked by 60% on Mar 2, reaching record high.

Since 2021, European natural gas price has been rising sharply, spiking up from 19.58 EUR/MWh in the beginning of the year to 180.68 EUR/MWh as of Dec 21, 2021.

The price was driven up by supply shortage. 90% of natural gas supply in Europe relies on imports, and Russia is largest origin supplying natural gas to Europe. In 2020, EU imported about 152.65 billion m3 of natural gas from Russia, 38% of total imports; and natural gas originated from Russia accounted for nearly 30% of the total consumption.

With the escalation of Russia-Ukraine conflict, Germany last week suspended the approval for Nord Stream 2 natural gas pipeline. US president Biden also announced sanctions against Nord Stream 2 pipeline project. In addition, some pipeline in Ukraine was damaged since the conflict. As a result, concerns about natural gas supply have exacerbated, leading to sharp rise in the price.

Methanol plants outside China are all based on natural gas as feedstock. Since Jun 2021, some methanol plants in Germany and Netherlands have announced to suspend production as natural price was too high which has again multiplied by several times from the level last year.

Methanol plants in Europe

Currently, methanol capacity amounts to 4.355 million tons/year in Europe, accounting for 2.7% of global total. Demand for methanol reached about 9 million tons in Europe in 2021 and over 50% of methanol supply relied on imports. The major origins contributing methanol to Europe were Middle East, North America and Russia (accounting for 18% of European methanol imports).

Methanol output in Russia reached 3 million tons a year, 1.5 million tons of which were exported to Europe. If the supply of methanol from Russia is suspended, European market could face a supply loss of 120-130kt per month. And if methanol production in Russia is disrupted, global methanol supply would be affected.

Recently, with sanctions imposed, methanol trading in Europe has become active with FOB Rotterdam methanol price advancing sharply, up 12% on Mar 2.

With the conflict unlikely to resolve in the short term, European market could be under strains from natural gas shortage in medium and longer run. Methanol plants in Europe could be impacted by the affordability with natural gas price spiking. FOB Rotterdam methanol price is expected to continue rising, and more cargoes could flow from Middle East and North America to Europe once the arbitrage spread widens. As a result, methanol cargoes of non-Iran origin to China would reduce. In addition, with the arbitrage open, China’s re-exporting methanol to Europe could increase. Methanol supply in China is earlier expected to be ample, but the situation may change.

However, with methanol price rising, downstream MTO plants suffer from bigger losses in China. Therefore, demand for methanol could be impacted and methanol price gains could be capped.