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European Gas Reaches New Highs on Russian Supply Concerns

Copyright © 2021 Energy Intelligence Group

European natural gas prices continue soaring on an unprecedented rally, reaching new record highs following fresh concerns over Russia’s ability to export additional gas to counter the extremely tight supply situation in the region. Spot LNG availability has remained mostly limited in the region as strong spot Asian prices have attracted cargoes to the higher-paying Asia-Pacific market, encouraging European reloads. Consultancy Timera Energy says LNG sendout into northwest Europe in July fell by over 70% from May to lows not seen since 2018, and 30% below 2020 levels. Rapidly rising TTF prices have narrowed the arbitrage with Asian spot LNG prices, indicating that spot LNG cargoes will be profitable to land in Europe in September. Whether this is enough to subdue the price rally or help refill storage facilities is yet to be seen. Meanwhile, European storage facilities are heading towards starting the winter season at historic lows, with inventories 61.5% full as of Aug. 15 compared to 88.8% full on the same date last year. The Rally The month-ahead September contract on the Dutch TTF hub, Europe’s de facto benchmark, rose to new highs of €47.95 per megawatt hour ($16.55 per million Btu) on Aug. 16. The same on the UK National Balancing Point surged to 119 pence per therm ($16.49/MMBtu) the same day, setting a new record surpassing the previous threshold of 115 pence per therm set in late 2005. On Aug. 17, the TTF and NBP month-ahead contracts dipped to €47.10/MWh and 117 pence per therm on slightly higher Russian flows to Europe. The TTF month-ahead contract is used as the reference price for LNG cargoes sent to Europe. Russian Export Concerns European traders are starting to be concerned that Gazprom’s reluctance to pipe more gas to its main customers is not only part of a sales strategy but rather due to constraints on its upstream. Gazprom has avoided booking incremental pipeline capacity to Europe through Ukraine for months, ensuring it could meet contractual obligations but not cover the additional demand for gas in the region. On Monday, Gazprom booked only 650,000 cubic meters per day of the 15 million cubic meters per day of firm transit capacity offered in Ukraine for September (LNGI Aug.16'21). However, flows through an alternative transit route using the Yamal-Europe pipeline crossing Belarus and Poland dropped at the start of August and fell further after a fire at a Gazprom condensate treatment plant on Aug. 5. From a pre-fire 82 MMcm/d on Jul. 30, Yamal-Europe flows remained historically low at 21.7 MMcm/d on Aug. 16, according to Entsog Transparency flow data. Traders are now speculating that meeting European demand is lower in Gazprom’s priorities than previously expected. Instead, it may be more concerned with meeting growing Russian demand and refilling domestic storage depleted during the cold first quarter. Gazprom supplied its European buyers from its Rehden and Katharina storage facilities in Germany instead of increasing deliveries through its other export routes, a sign it does not have additional volumes available, a European trader tells Energy Intelligence. Norway Falters Other piped supply sources have been unable to mitigate the Russian supply dip. Norwegian producers have been saddled with a heavily scheduled maintenance period this year, particularly in the second quarter, after the Covid-19 pandemic forced companies to postpone crucial work. An unplanned outage at the massive Troll gas field between Jul. 15 and Aug. 5 also hit Norwegian output at the start of the month. Norwegian flows have since risen to over 300 MMcm/d but are expected to be reduced once again in September when another round of maintenance work will resume. Gas-to-Coal Switching Gas prices are high enough to cause displacement of gas-fired power generation from the electricity merit order in Western Europe -- favoring coal-fired power (LNGI Jul.2'21). Coal consumption will likely remain strong for the rest of the year, especially if gains in European gas prices continue to outpace EU carbon prices. However, rising coal prices, as high demand in Asia encourages buyers there to outbid Europe for coal supply, is endangering the sustained fuel switch. “Given the lack of elasticity in Europe’s coal supply to high prices, the two commodities are now chasing each other upwards,” consultancy Energy Aspects said in a recent research note. Jaime Concha, Copenhagen

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