Natural gas markets have kicked off the new week on a bullish note, with Henry Hub gas prices jumping 26.4% to $2.03/MMBtu while natural gas futures are up 5.5% at 1330 hrs ET in Monday's session. The rally appears to have been triggered by concerns regarding the termination of Russian gas flows.
Back in 2019, Russia and Ukraine signed a five-year pipeline transit agreement to supply natural gas to Europe. Both countries have continued to honor the contract despite Russia waging war on Ukraine for two years now. But that arrangement is now poised to come to an end after Kyiv signaled it has no intention to renew the pact when it expires on December 31, while EU energy chief Kadri Simson has indicated that the EU executive has "no interest" in pushing to revive the agreement. Ukraine gas amounts to 5% of total EU gas imports with Aura Sabadus, a senior analyst at the ICIS market intelligence firm, telling Politico that Austria, Hungary, and Slovakia are likely to be the hardest hit when the imports are cut off.
Thankfully, long-suffering gas producers could be in for a rare boon if Europe weans itself off more Russian energy commodities. TotalEnergies (NYSE:TTE) CEO Patrick Pouyanne has predicted that natural gas and LNG prices will spike after the EU sanctions Russian gas from the Yamal LNG project.
"If the EU sanctions Yamal LNG, the price of LNG will go up quickly and globally our portfolio will benefit. It's a positive if there were sanctions, not a negative, because the cash from Yamal is quite limited. European leaders understand that their security of supply today relies on LNG and they don't want to see price rises again... what I understand is that they might have some ideas, but from 2027 on, not before," Pouyanne told Reuters.
TotalEnergies owns a 19.4% stake in private Russian LNG producer Novatek, owner of the Yamal LNG project in eastern Russia. The company has not received a dividend from Yamal LNG since 2023 thanks to U.S. and EU sanctions. It, however, received about $450 million in half-year dividends from Novatek in late 2022.
The EU has warned member countries to prepare for the worst-case scenario in the event the loss of Russian gas is accompanied by a harsh winter. The situation is further exacerbated by the recent decision by Berlin to unilaterally tax gas exports, making it harder for these countries to swap Russian imports for supplies coming via Germany, Italy, or Turkey.
"We should avoid steps that will damage the work done and strengthen the Russian aggressor," Czech Industry Minister Jozef SÃkela said of the levy last week.
The bloc has so far managed to phase out about two-thirds of Russian gas imports and increased imports from the U.S. and Norway. Still, Russia supplied 14.8% of the EU's gas in 2023. Whether or not the EU will proceed with the sanctions remains to be seen considering that European politicians are under pressure to keep energy prices in check and secure supplies, with memories of record gas prices following Russia's invasion of Ukraine in 2022 still fresh.
Record Gas Inventories
Overall market fundamentals, however, remain weak with global markets currently flush with gas amid a tepid demand outlook. Last week, EU gas inventories stood at just over 72 billion cubic meters, or 62% full, a record for this time of the year while gas reservoirs in California are almost full ahead of schedule in restocking for the next heating season. Last week, the U.S. Energy Information Administration (EIA) reported that natural gas stocks for the week ended April 19, 2024, were 2,425 Bcf vs. 2,333 Bcf for the week ended April 12, 2024. That implies a net change of +92 Bcf vs. +50 Bcf for the week ended April 12, 2024. U.S. gas stocks were 439 Bcf higher than last year at this time and 655 Bcf above the five-year average of 1,770 Bcf. Further, at 2,425 Bcf, total working gas is above the five-year historical range.
On the demand side, Europe is about to face a warm weather front, slashing the demand for gas in the continent while more supply is likely to come online in the coming weeks as the U.S. Freeport LNG plant overcomes some of its technical problems. For months, the plant--the second-largest U.S. liquefied natural gas (LNG) export facility-- has been running below 80% of its capacity due to technical problems
By Alex Kimani for Oilprice.com
Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More
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