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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Natural Gas Prices Could Spike As EU Prepares to Slash More Russian Gas

  • Brussels has been urging EU countries to phase out Russian fossil fuels by 2027.
  • The EU will have to contend with even less Russian gas after Ukraine signaled it has no intention to renew the current 5-year pipeline transit agreement with Moscow.
  • Luckily for Europe, it would take an extraordinary set of circumstances for the continent to run out of gas any time soon with storage levels currently at historical highs.
Pipeline

Back in 2019, Russia and Ukraine inked a five-year pipeline transit agreement to supply natural gas to EU countries. Both countries have continued to honor the deal despite two years of war raging in Ukraine. But now the EU will have to contend with even less Russian gas after Ukraine 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.  

And now, the EU is warning member countries to prepare for the worst-case scenario in the event the loss is accompanied by a harsh winter. 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. Such a scenario would likely trigger another gas price rally, with prices having hit record highs shortly after Russia invaded Ukraine. 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. Related: 2 Ways to Play Europe’s $800 Billion Energy Crisis

"We should avoid steps that will damage the work done and strengthen the Russian aggressor," Czech Industry Minister Jozef Síkela said of the levy last week. 

Brussels has been urging EU countries to phase out Russian fossil fuels by 2027. The bloc has so far managed to phase out about two-thirds of Russian gas imports and increasing imports from the U.S. and Norway. The EU executive says losing Russian supplies through Ukraine may lead to higher transport costs while storage levies imposed between the bloc’s countries could "make this diversification more difficult and costly."

Ample Gas Inventories

Luckily for Europe, it would take an extraordinary set of circumstances for the continent to run out of gas any time soon with storage levels currently at historical highs. 

Commodity analysts at Standard Chartered have predicted that EU gas inventories will finish the current withdrawal season at a record high, setting the scene for a summer of low prices. 

StanChart notes that there was a market tightening in mid-January when a cold snap pushed weekly draws above six billion cubic meters (bcm) and narrowed the surplus above the five-year average. However, the tightening was only brief, and inventories have climbed above the five-year average while draws have dropped below 1.7 bcm. 

StanChart has forecast that the continent will finish the current withdrawal season with a new record of at least 67.5 bcm of gas, beating the previous record of 63.9 bcm. In contrast, Europe finished the 2022 season with just 29.1 bcm of gas shortly after Russia invaded Ukraine, pushing Dutch Title Transfer Facility (TTF) prices to record highs (current prices are more than 90% below their 2022 peak). StanChart has predicted that low gas prices will allow some lost demand to return. 

EU gas demand for the first 16 days of February was 12.4% lower compared to the previous year’s comparable period and 18.4% lower than in February 2022. However, StanChart has warned that some demand will not return no matter how low prices fall thanks to some industrial capacity shutting down, moving to other regions or switching to other feedstocks. 

Meanwhile, weak demand has continued to depress U.S. gas markets, with Henry Hub gas prices nearly 30% lower in the year-to-date. The market has, however, kicked off the new week on a bullish note with prices spiking after natural gas giant EQT Corp. (NYSE:EQT) announced it would cut output in response to low prices. 

On Monday, EQT announced that it will curtail ~1B cf/day of natural gas production through March, after which it will reassess market conditions to determine its next course of action. The top U.S. natural gas producer cited "the current low natural gas price environment resulting from warm winter weather and consequent elevated storage inventories" for its decision. The curtailments will total 30B-40B cf of the company’s net production during the first quarter. Other leading gas producers including Chesapeake Energy Corp. (NASDAQ:CHK), Antero Resources Corp.(NYSE:AR) and Comstock Resources Inc. (NYSE:CRK) have announced plans to reduce drilling this year.

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Henry Hub gas price was up 7.3% to trade at $1.97/MMBtu at 12.30 pm ET; United States Natural Gas Fund, LP (NYSEARCA:UNG) gained 7.4% while ProShares Ultra Bloomberg Natural Gas (NYSEARCA:BOIL) spiked 14.9%.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on March 05 2024 said:
    The less Russian gas the EU uses, the more LNG particularly American LNG it needs to import and the deeper the plunge of its economic growth to almost zero. If the Europeans are happy to pay such a hefty price for not using the cheaper and plentiful Russian piped gas, that is their affair.

    The fact that global demand for both piped gas and LNG is projected to rise steeply soon with prices projected to spike will increase the severity of Europe's ordeal and the degradation of its economy. Demand for LNG is projected to grow by 50% between 2024 and 2034 whilst the global gas trade is also projected to rise from 450 million tons (mt) in 2023 to a projected 688-700 mt by 2040, a rise of 51%-56%.

    Moreover, the Gas Exporting Countries Forum (GECF) which had just ended a summit meeting in Algiers and whose members account for 63% of global proven gas reserves is planning to regulate the gas market exactly as OPEC does in the oil market can only mean that gas prices will surge higher adding to the extreme misery of Europe.

    That is why I am convinced that once the Ukraine conflict has been settled, the Europeans led by Europe's largest economy Germany will resume their purchases of Russian gas if they are to avoid a collapse of their economies.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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