EU gas price cap, Russian pipeline explosion and winter arrives in the US
After a few volatile weeks on the back of Europe’s first winter cold snap, gas prices have been sliding, reaching $33.76 per million British thermal units (MMBtu) on the Netherlands-based Title Transfer Facility (TTF) on 20 December, down 20% week-on-week.
Prices on the UK’s National Balancing Point (NBP) are currently tracking the TTF price.
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Current weather forecasts indicate that temperatures in Europe will be above normal towards year-end, likely lowering prices further.
Gas continues to be withdrawn from Europe’s underground storage, with facilities presently 86% full at roughly 94 billion cubic meters (Bcm).
On the supply side, Russian flows through Ukraine into continental Europe have held steady at around 43 million cubic meters a day (MMcmd) in recent weeks, but these volumes could be at risk due to an explosion following maintenance on the Urengoy-Pomary-Uzhgorod (UPU) gas pipeline inside Russia.
This may yet have a minimal impact on volumes and prices as it could take just a few days to repair the damage and alternative routes are available for Russian gas to transit Ukraine.
On 19 December, the European Commission agreed to cap gas prices at €180 (US$191) per megawatt-hour (MWh) from 15 February 2023.
This is roughly €70/MWh higher than the current TTF forward curve price.
The mechanism will have a minimal impact on current market conditions while protecting consumers from extreme price spikes.
The cap is still seen as being high enough to incentivize gas exports to Europe and reduce demand.
In Asia, traded prices on the Japan-Korea Marker (JKM) have continued to rise around 9% week-on-week to $36.49/MMBtu on the back of colder weather and increased demand.
In the US, prices have dropped 17% week-on-week to $5.34/MMBtu at the time of writing as the total gas supply remains close to 100 billion cubic feet per day (Bcfd).
Europe
Russian flows through Ukraine have held steady at around 43 MMcmd, with Russian flows through the TurkStream pipeline also stable at 35 MMcmd.
However, volumes transiting Ukraine are at risk, with a potential upward impact on prices.
A section of the Urengoy-Pomary-Uzhgorod (UPU) gas pipeline in Chuvashia, Russia, was damaged by an explosion on 20 December during repair work and is currently blocked on both sides.
The UPU pipeline is a part of Russia’s ‘Brotherhood’ pipeline network and is used to send gas to continental Europe.
Mikhail Faleyev, former deputy head of Russia’s ministry for emergencies, has been quoted in RIA as saying that the damaged section is expected to be restored within a few days.
If this doesn’t happen, gas could be re-directed from the UPU pipeline to one of four other pipelines that run alongside it with a total capacity of 100 billion cubic meters (Bcm).
However, it is hard to quantify precisely how much gas could be redirected in this way.
If Russian flows through Ukraine were to halt entirely, this would put upward pressure on gas prices in Europe, as the volumes represent around 4% of Europe’s total annual gas demand.
Countries directly importing gas from the Ukrainian transit and connecting pipelines would also face consequences, including Slovakia, the Czech Republic, Austria, Germany, France, Switzerland, Slovenia, Croatia and Italy.
All these countries have sufficient volumes of natural gas in storage.
Alongside Russian pipeline imports, Europe’s other major gas supplier Norway is continuing to keep supply at healthy levels.
In recent weeks, Norwegian gas flows have been stable at around 330 MMcmd.
On 20 December, exit nominations from the Norwegian Continental Shelf (NCS) totaled 327 MMcmd.
This week, Norway’s state-owned gas pipeline operator Gassco reported an unplanned outage at Aasta Hansteen, impacting 14.8 MMcmd for two days (20-21 December).
In other news, Norwegian group Equinor has announced plans to invest $1.34 billion to update the Hammerfest LNG plant.
With Europe’s first cold snap over, the weather forecast for the coming fortnight points to milder temperatures for the remainder of 2022, contributing to a downside risk on prices.
For now, Europe is continuing to draw down its gas reserves, with European storage facilities presently 86% full at roughly 94 billion cubic meters (Bcm).
The withdrawal rate is currently around 453 MMcmd, over 100 MMcmd lower than a week ago.
At a country level, UK storage is at 68%, France is at 84%, and Germany is at 87%.
France has adjusted its power supply risk due to high nuclear and hydropower output and reduced demand.
On the LNG side, Europe continues to import robust volumes.
Last week, gross LNG imports into Europe reached 3.08 million tonnes (Mt), with significant buyers including France, the UK and Spain.
France continues to be Europe’s major LNG importer, with a total of 0.72 Mt of LNG imported last week.
On 21 December, Germany will receive its first LNG vessel Seapeak Hispania to the Lumbin regasification facility, putting additional downside risk on prices.
Even with Freeport out, the US continues to be Europe’s largest LNG exporter, sending over 1.16 million tonnes (Mt) last week.
Agreement within the EC on price cap mechanism
On 19 December, the European Commission agreed to cap gas prices at €180/MWh from 15 February 2023.
The cap will be triggered when TTF front-month prices are above €180/MWh for three consecutive days and €35/MWh above the LNG price.
The cap is roughly €70/MWh higher than the TTF’s current forward curve price, which is unlikely to be triggered, but it will protect European consumers from the sort of extreme price spikes seen earlier this year.
Given that the cap has been set significantly higher than current and normal gas prices, we do not believe it will reduce supply or worsen Europe’s gas deficit.
We also believe it will continue incentivizing gas exports to Europe at maximum levels.
Europe’s attractiveness as a market for LNG will be taken care of through the LNG differential component in the price cap.
Concerns have also been raised that the price cap will incentivize higher gas demand.
This is less likely considering where the market is presently trading but is a valid concern if drastic demand reduction is required during periods of extreme deficit.
However, gas demand is already significantly reduced, especially in the industrial sector, at price levels around €100-130/MWh.
The demand reduction will be even more significant at €180/MWh; hence, there is currently little risk of the price cap driving additional demand for gas.
The cap will also be suspended if it leads to more extensive gas shortages in Europe or stymies trading on European price hubs, impacting liquidity.
Asia
Traded gas prices on the Japan-Korea Marker (JKM) have risen 9% week-on-week to $36/MMBtu and still tracking Europe’s TTF price.
Weather-wise, the forecast for China in the coming fortnight indicates temperatures will be close to or above average.
By contrast, Japan and South Korea are forecast to be colder than average towards year-end, leading to higher winter gas demand.
With Covid-19 restrictions easing in China, the market is expecting an uptick in gas demand in the industrial and power sectors.
In some regions, heating demand has been rising above 2021 levels.
Colder weather in Asia last week and in the short term has sent some North Asian players back to the global spot LNG market, competing with European buyers.
Storage inventories in Japan and South Korea are still at high levels, despite storage withdrawals now underway.
US
Front-month Henry Hub gas prices have fallen 9% to around $5.34/MMBtu at the time of writing, with gas continuing to be withdrawn from storage.
US storage levels are now at 3,412 billion cubic feet (Bcf), a decrease of 50 Bcf week-on-week, mainly due to colder-than-normal temperatures across the US last week.
Prices are set to climb in the short term, with the current weather forecast still seeing colder-than-normal temperatures towards year-end, especially in the US South Central, East and Midwest regions.
This week, the Central US region could experience a Polar vortex which could break regional temperature records.
Natural gas deliveries to US LNG export facilities averaged 12.4 Bcfd last week, with total US gas consumption rising 2.6%, including a 1.2% increase in the gas-for-power sector.
There has also been a slight increase in domestic production, though total gas supply levels remain close to 100 Bcfd.
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