That giant sucking noise is billions of “excess euros” being wired to Russia as Putin flexes his muscles showing Europe just how “transitory” record nat gas prices can be.
Natural gas prices in Europe hit a new record high as a slow at first, then much faster tightening of Russian supply looks set to cause a storage crunch on the continent.
As Bloomberg’s Stephen Stapczynski observes, Russian gas flows via the Yamal-Europe pipeline that runs across Belarus and Poland to Mallnow, Germany…
… suddenly dropped over the weekend, leaving Europe out of time to refill inventories ahead of the winter. As the chart below shows, the amount of gas entering Germany at the Mallnow compressor station has plunged by almost half, signaling Russia is flowing less through the Yamal-Europe in what may be a Kremlin shot across the European bow, and a reminder who literally keeps the lights open during the winter.
As Bloomberg notes, the extraordinary, globe-spanning supply crunch in natural gas has fueled “eye-watering price rallies from the Netherlands to China, and investors are primed to see whether the gains are extended.” Indeed, it’s not just Europe: Asian liquefied natural gas prices are nearing a seasonal high as importers compete for supply amid the hotter summer weather. Meanwhile, none of the 4Q capacity to flow more gas to Europe via Mallnow was booked in an auction Monday.
So what’s going on? Call it a perfect storm of declining supplies, lack of sufficient inventories and ongoing geopolitical posturing as Russia piles pressure on EU authorities to approve the dual-pipeline Nord Stream 2 project through the Baltic Sea and into Germany, while gas shippers are running low on time and, indeed, options to keep Europe adequately supplied this winter. A worst case scenario could see European gas prices explode to suborbital levels that would make Jeff Bezos proud should the continent fail to stock up on sufficient nat gas amounts.
According to Platts, 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. And 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 storage is not filling quickly and is 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.
Indeed, 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 meters 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, although with the geopolitical picture getting worse by the day, “something” will definitely change.
According to Platts, using data from Gas Infrastructure Europe, over the two storage winters between October 2018-March 2019 and October 2019-March 2020, Europe called upon 43 Bcm of storage withdrawal to meet demand. 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.
Yes, there is a non-trivial chance Europe could literally freeze.
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. It also means that in the meantime, European nat gas prices could soar to even more nosebleed levels in coming weeks.
Ironically, Bloomberg notes that the broad-based advances may encourage utilities in Europe to switch to dirtier-burning coal, even though that fuel is also near a record. And just like that, Europe’s oh so noble ESG/Green4eva mask is about to fall off as soon as it becomes clear that the alternative is either record prices or bundling up real warm to survive the winter. Some generators, which had been delaying LNG spot procurement in the hope prices would fall, must now bite the bullet and buy the fuel at sky-high rates.
