European Gas Prices Rise to 13-Year High

European spot natural gas prices are trading at 13-year highs following continued tighter supply availability and the lowest inventory levels since 2018. But European LNG intake is hindered at the moment by planned maintenance work at receiving terminals in France and the Netherlands, forcing the market to rely on piped supplies for incremental volumes. A number of Norwegian gas fields and processing plants are also out of commission due to scheduled and unscheduled outages, restricting Northwest European supply, forcing a reliance on incremental Russian piped gas to meet demand. The month-ahead contract at the Dutch TTF gas trading hub, Europe’s de facto benchmark, was trading at around €31.50 per megawatt hours ($11 per million Btu) at market close Thursday, its highest since September 2008. It also represented a 64% gain since the start of the year and more than five times its value compared to the same date in 2020. The month-ahead contract serves as the pricing indicator for LNG headed to Europe. Bullishness Continues Europe’s current bullish situation stems from the aftereffects of a drawn-out period of colder-than-seasonal temperatures in both Europe and Asia during the 2020-21 winter season. High demand in Asia and regional supply disruptions caused the Asian JKM spot price to shoot up, drawing spot LNG cargoes away from Europe and towards the higher paying Asia-Pacific market (LNGI Jan.12'21). European players were forced to rely on piped supplies and stored gas. The colder temperatures extended well into the spring and kept demand for natural gas high (LNGI Apr.8'21). This did not allow European market players to refill storage tanks during the traditional six-month injection period starting in April. European natural gas storage was at around 503.5 terawatt hours (47.8 Bcm), or 45% full, on Jun. 20, according to Gas Infrastructure Europe. This level was 42% lower than the level seen a year ago and the lowest for this time of year since 2018. Despite storage injection picking up in June, some countries nonetheless still have extremely low stocks: inventories remain 28.5% full in Austria, 27% full in the Netherlands and 19% full in the UK. The bullish picture will continue into July as a result of limited supply availability as planned maintenance across Europe could continue to crimp injections. This will leave Europe at risk at starting the high-demand winter period without the backup of full gas inventories, leaving the region at the mercy of supply disruptions and LNG cargo diversions. The Karsto gas processing plant and the Skarv gas field were two of the various Norwegian gas infrastructures that are crimping flows out of the Northern European country. Karsto is scheduled to come back on Sep. 23 while Skarv could come back on Jun. 28. Various planned maintenance works at France’s Dunkirk, Montoir and Fos Cavaou LNG terminals are scheduled until the end of June. The Dutch Gate terminal is out for maintenance from Jun. 15 until Jul. 11. In July, Gazprom’s Nord Stream pipeline will be shut for maintenance from Jul. 13-25, further curtailing piped flows to Europe. Russia Holds the Cards Russia’s export strategy toward Europe, its largest gas buyer, will be key in determining the pricing level and supply availability this summer. Gazprom has refrained from booking extra Ukrainian transport capacity this year, keeping overall volumes sufficiently high to meet its long-term contractual obligations with its European clients but not high enough to meet the broader market’s supply gap. It is not clear why Gazprom is pursuing this strategy -- the most likely explanation being that it is keeping export volumes at conservative levels to keep prices high to recoup revenues after a lackluster 2020 (LNGI Jan.15'21). The theory goes that higher hub prices help Gazprom compete with spot LNG imports and boost revenue as the company pursues new ambitious projects. It is the flip side of its strategy of a couple of years ago, when Gazprom seemed to be flooding the European market with volumes in order to maintain its market share in the Continent and keep US LNG out. Jaime Concha, Copenhagen