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European winter gas prices hits 13-year high as Russia tightens supply

Highlights

26.5 Bcm of Russian supply lost since Dec 2019 vs 2018 level

Possible problems for storage if another 20 Bcm is lost in SY-21

Wholesale natural gas prices for next winter in Europe have reached their highest levels in 13 years, as a slow but ongoing tightening of Russian supply looks set to cause a storage crunch on the continent, S&P Global Platts analysis found.

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As Russia piles pressure on EU authorities to approve the dual-pipeline Nord Stream 2 project through the Baltic Sea and into Germany, gas shippers are running low on time and, indeed, options to keep Europe adequately supplied this winter.

According to Platts Market on Close price assessments, both the British NBP and Dutch TTF bellwether hubs have decisively risen above their previous peaks in September 2018 when the after-effects of the 'Beast from the East' weather system earlier that year buoyed spot-market prices and drained storage reserves to multi-year lows.

Now in similar circumstances storage-wise, the NBP Winter 2021 product, which delivers between October 2021 and March 2022, was assessed at 83.95 pence/therm ($1.17/therm) by Platts on June 23, above its previous peak at 82.40 p/th on Sept. 24, 2018. The Dutch TTF equivalent was valued at Eur31.475/MWh ($37.6/MWh), passing its 2018 peak two days earlier.

The record high for NBP front-winter was 103.75 p/th on July 24, 2008.

Storage wars

Although European storage inventory is now approximately at 2018 levels, that has been supported from a much higher starting position, and the circumstances surrounding Russian supply to Europe are very different this year.

Indeed, Platts analysis found that the situation has been two years in the making, with Russian flows to Europe through Ukraine as prescribed by the December 2019 EU-brokered transport accord the main contributory factor.

Moreover, Russia's state-owned Gazprom Export is not making Ukrainian transport capacity bookings at anywhere near the level where 2018 flows could be achieved, and has been injecting minimal amounts into its own European storage space.

Consequently, European storages are not filling quickly and are unlikely to be adequately topped up by the start of winter, making storage a key source of leverage for Russia's Nord Stream 2 and, therefore, a key battleground in the political endgame.

Compared to the most relevant comparable year, 2018, Russian exports to the EU via Nord Stream 1, Yamal and Ukraine to Slovakia have dropped by 26.5 billion cu m in the two storage years from April 2019.

If nothing changes, like Gazprom Export's Director General Elena Burmistrova recently told a news conference it would not, then a further 20 Bcm could potentially be unavailable for European storage.

Over the two storage winters between October 2018-March 2019 and October 2019-March 2020, Europe has called upon 43 Bcm of storage withdrawal to meet demand, according to data from Gas Infrastructure Europe. This past winter, it required 68 Bcm.

While the analysis showed Norwegian exports have also dipped during this time, and are lower year on year due to pandemic-delayed maintenance now being performed, heightened LNG imports and pipeline volumes from Algeria have more than compensated in areas where greater supply alternatives exist.

In regions where these alternatives are not as extensive, such as Germany, which is projected to see over 10 Bcm less Russian-sourced gas retained this year compared with 2018, the storage situation could quickly become acute.

While some may point to a cold start to summer delivery for stunted injections until now, that could only account at best for 13.15 Bcm of a 24.36 Bcm storage deficit this year if current flows are extrapolated, leaving just 5.5 Bcm in European storage by winter's end. That excludes the potential for any winter injections, which may be denied as they were at the start of summer.

A likely scenario where Norwegian production reverts to 2018 volumes and LNG sustains at storage year 2020 levels would still only see storage inventory at post-'Beast' lows, and with a deteriorating restock potential.

At worst, if the unseasonably cold weather of Winter 2020 delivery were to be repeated, the additional 9.16 Bcm differential seen withdrawn as a result has the potential to drain storage to dangerously low levels.

In 2018's "Beast from the East", spot gas prices still spiked with European storages 28% full at 29.27 Bcm due to regional influence, particularly from the UK, where there were reports of NBP traders losing an entire year's profit as they were caught short of the record spot prices.

So, one reason why winter prices have been rising is that hedges need to be in place across Europe to secure scarce supply and immunize shippers from price spikes. With winter delivery still over three months away, that will likely come at an ever-growing premium.

EUROPEAN GAS IMPORTS COMPARED TO 2018 STORAGE LOWS
(Bcm/year)
Russia
Norway
Algeria
LNG
TOTAL
Import
Delta vs 2018
Import
Delta vs 2018
Import
Delta vs 2018
Import
Delta vs 2018
Import
2018 delta sum
April 2018-March 2019
137.103
109.302
13.616
42.2
302.221
April 2019-March 2020
131.294
-5.809
101.174
-8.128
8.64
-4.976
69.192
26.992
310.3
8.079
April 2020-March 2021
116.43
-20.673
101.9
-7.402
14.83
1.214
53.337
11.137
286.497
-15.724
Projection
April 2021- present (81 days)
25.978
21.702
4.618
2022 pipeline delta projection
April 2021- March 2022 (linear projection)
117.061
-20.042
97.793
-11.509
20.810
7.194
-24.357
EUROPEAN STORAGE LEVELS AT START, END OF STORAGE YEARS, AND CURRENT INJECTIONS COMPARED TO 2018
(Bcm/year)
Mar 31 inventory before storage year
Year-on-year change
Delta caused by demand fluctuation (Import delta minus y-o-y change)
Jun 21 Inventory
Accrued in SY-to-June 21
2018 Delta
Sept. 30 inventory storage year end
2018
18.159
46.946
28.787
85
2019
41.826
23.667
71.224
29.398
0.611
100.5
2020
56.752
14.926
6.847
82.086
25.334
-3.453
100
2021
31.867
-24.885
-9.161
47.503
15.636
-13.151
STORAGE YEAR 2022 PROJECTION
(Bcm/year, ceteris parabus, excludes winter injection potential)
2022 pipeline delta projection (as above)
plus SY20 LNG Delta
minus SY21 accural delta
Mar 31, 2022 Storage level projection
-24.357
11.137
-13.151
5.496
Source: Gas Infrastructure Europe, S&P Global Platts