Ongoing heatwaves in North-East Asia and Europe, upcoming gas field maintenance in the North Sea, low LNG (Liquified Natural Gas) deliveries and geopolitical tensions have all supported gas volatility in the European and UK gas markets this month. This is now being driven strongly by the events of the past week, with Ukraine’s excursion into Russian territory citing renewed Russian gas concerns. Fighting is reported to have reached the Russian town of Sudzha, which is where Russian gas flows into the Ukraine and then on to EU countries such as Austria, the Czech Republic and Hungary who are still heavily dependent on Russian Gas imports. Although it is still unconfirmed if the Ukraine has captured the gas measuring facility, Ukraine’s gas transmission operator has confirmed that transit flows via Sudzha appear to stable without any changes.
An average of 42 million cubic meters of Russian gas flows into Ukraine every day, with Sudzha playing host to a gas metering system that measures supplies flowing into Europe. Despite the war with Russia, Kyiv has allowed the gas to continue flowing through its Soviet-era gas pipeline unabated as part of a $2bn-a-year contract between state-owned Naftogaz and Russia’s Gazprom. The agreement on Russian gas transit to Europe through Ukraine expires in 2024, and Ukraine has already stated that it has no intention of extending it or concluding a new deal, but if flows are disrupted prior to the expected termination date, gas prices could spike very quickly, putting further pressure on European consumers and industry. Clashes have also been reported close to a large nuclear power plant located in the town of Kurchatov. This facility could prove crucial as Ukrainian forces could use the plant as leverage or simply disable operations at the plant depriving Russia of a crucial source of electricity. Either way, the fighting in the region is increasing anxiety in the market and higher levels of risk are returning to spot pricing.
Despite the year-on-year decrease in LNG deliveries and a warmer than average summer, European gas storage levels have risen steadily, with facilities currently 86.5% full (a near record high) and assuming steady flows through Sudzha continue, bearish fundamentals should send prices back down in the coming weeks: temperatures should stop being supportive and French power supply is well above seasonal levels while European energy demand is expected to remain stable amid a weakening economic environment.
