European energy crisis is gas demand-driven: VTBC
The European energy crisis is primarily driven by rising gas demand rather than supply limitations, analysts at VTB Capital (VTBC) said on October 21, contrary to claims by some European politicians that Russia withholding some supplies is to blame.
"We would disagree with the statement that the current energy crisis in Europe is the gas supply crisis," VTBC said in a research note. "We note that growth in gas price was initially driven by the demand hike rather than supply limitations."
Demand for gas grew during the cold and long winter of 2020-21, while a hot summer also drove up energy demand. Performance has also been poor at wind farms, and coupled with the closure of coal power plants, this has put pressure on gas to deliver Europe's energy needs, VTBC said.
"Relatively high gas prices in April-May prevented refilling of gas storages as gas companies were hoping for lower gas prices at the end of summer after the passing of the peak demand," the brokerage said. "However, at the end of summer gas prices started to set historical records."
Europe is therefore entering winter with less gas in stock than usual, and this is not only due to the actions of Gazprom, which owns under 10% of gas storage capacity in Europe, VTBC said.
"This is not an issue in and of itself though, and if the coming winter is just usual (not extremely cold), it will all pass smoothly," VTBC said. "Therefore, we do not think that gas prices above $1,000/'000 m3 are sustainable as they account for a really catastrophic scenario of extremely harsh winter not only in Europe, but globally as well as the reduction in LNG deliveries, which has not been the case so far."
While Gazprom has by all accounts been complying with its supply obligations, it has faced criticism in Europe for not releasing more gas onto the spot market. Some EU lawmakers are pushing for the European Commission to investigate the Russian gas company for anti-competitive behaviour, and the commission itself has said that Russia is not doing enough to ease the supply crunch.
"Russia is ready to supply more gas if it is desired by the European customers," VTBC said. "But it looks like Europe is not ready to buy more gas form Gazprom at current prices."
VTBC also dismissed that there was a bottleneck in gas export capacity. Nord Stream 2 , whenever it is launched, will only carry gas that was previously sent via Ukraine and other routes. Although end users should benefit from the pipeline's start-up as gas transport expenses will be nearly halved versus delivery through Ukraine.
"We believe that in the emergency situation Russia will be able to increase gas production by some 0.1bn m3 per day, which will cover additional European gas demand in case of a very harsh winter," VTBC said.
Gazprom ramped up supply to Europe by 19.3% year on year in the first nine months of 2021, and has said it is now flowing gas at near record levels.
Russian energy minister Nikolai Shulginov announced on October 20 that Russia's gas storage facilities were now 97% full. They should reach 100% utilisation by November, he said.
The November gas delivery contract at the Dutch TTF hub is up more than 5% today at €88.7/MWh.