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Russian oil-indexed gas prices set to rise on OPEC decision, oil rally

The price of oil-indexed Russian gas is expected to rise through the course of 2017 following the recent oil price rally triggered by the decision by OPEC and non-OPEC countries to cut production from the start of next year, according to an S&P Global Platts analysis.

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The rise in the oil-indexed price range makes prices on the European hubs more competitive more quickly with Russian gas in Q1 2017, suggesting European buyers may maximize their nominations in the next two months or so.

Oil prices have surged almost 20% in the week since the decision by OPEC to cut production by 1.2 million b/d, accompanied by a pledge by non-OPEC producers to remove 600,000 b/d from the market, including a 300,000 b/d Russian cut.

Although oil-indexed gas contracts typically operate with a 6-9 month time lag, the impact of the oil price rally on Russian gas -- and how it competes against European gas hubs -- is sharply felt along the forward curve.



The Dutch TTF price was assessed Tuesday by Platts at Eur16.25/MWh for January 2017 and Eur16.325/MWh for February 2017, while the top of the oil indexed range is estimated by Platts Analytics' Eclipse Energy at Eur17.02/MWh for January and Eur17.60/MWh for February.

The top of the oil indexed range has been cheaper than TTF month-ahead prices through October, November and December, which has seen Russian gas exports to Europe hit repeated all-time highs as buyers maximize their purchases under long-term contracts.

Q1 PURCHASES

European buyers have an incentive to continue to buy maximum volumes of Russian gas through December and January as the oil price rally takes time to work through to the oil-indexed gas contract price, according to Platts Analytics.

They could even continue to buy through February given that many European contracts for Russian gas are thought to be at the lower level of the oil index range.

From Q2, however, Russian gas flows may fall as European hubs become increasingly competitive, according to the current forward curve.

The top of the range blows out to Eur20-21/MWh in June-December next year, well above the corresponding TTF month-ahead price of Eur15-16.5/MWh in the period.

Analysts are, however, increasingly skeptical about the OPEC and non-OPEC production pact holding, with oil prices slipping back slightly Tuesday.

A fall back in oil prices would bring oil-indexed gas prices back down.

At 1245 GMT, Brent was trading down 0.6% at $53.61/b, while WTI had fallen 0.6% to $50.62/b, compared with the close Tuesday.

Higher global oil prices also incentivize US shale producers to open the taps and bring back volumes shut in during the lower oil prices, which would be bearish again for the global oil price.

BENEFICIAL FOR GAZPROM

While the oil price shift could make Russian gas less competitive against the hubs, it will at least enable Gazprom to make more money for its gas than has been the case over the course of 2016.

Gazprom's realized European gas price was $182.50/1,000 cu m in the first half of 2016, but has fallen further since.

It is more than half the level in 2013 when prices averaged $385/1,000 cu m. Prices fell in subsequent years to $349/1,000 cu m in 2014 and $243/1,000 cu m in 2015.

The dramatic fall in price has made Russian gas more attractive in Europe, but Gazprom has seen its economic performance slip as a result.

Analysts at Moscow-based Aton Research say Gazprom could benefit from the OPEC/non-OPEC pact.

"Gazprom appears to be the one and only beneficiary in Russian oil and gas from the pro rata 300,000 b/d crude oil production cut," Aton analyst Alexander Kornilov said.

"If the OPEC-Russia accord works as it is intended, the oil price will rise, resulting in a higher gas export price for Gazprom with no reduction in output," Kornilov said.

"Gas output has nothing to do with the crude market, and has a life of its own. Moreover, Gazprom is recording new record-high daily export volumes to non-former Soviet Union countries almost every day," he said.

Russian gas supplies to Europe and Turkey are set to reach a record high of some 175 Bcm in 2016, a level some 13 Bcm above the previous annual high from 2013.

--Stuart Elliott, stuart.elliott@spglobal.com

--Edited by Dan Lalor, daniel.lalor@spglobal.com