European natural gas prices rallied again this week as Russia continued to curb deliveries to the region. Prices are rebounding following a sharp drop in the final days of 2021 (GM Dec. 31, 2021).
Russian gas volumes flowing to Europe via key pipelines have fallen to the lowest level for this time of year since at least 2015, Bloomberg reported – just as temperatures are dropping again after a warmer-than-usual holiday period.
Lower gas supplies also come amid escalating geopolitical tensions between Russia and Ukraine, and U.S. warnings of a possible invasion of Ukraine early this year. About a third of Russian gas flowing to Europe crosses Ukraine, and any disruption to these supplies could turn the current European energy crunch into a widespread crisis.
Russian gas flows to Europe via Ukraine already remain limited, according to a Bloomberg report, citing data from system operator Bratislava, Slovakia-based Eustream.
The Yamal-Europe pipeline, a major link from Russia, is also continuing to send gas from Germany to Poland, which is the reverse of the normal direction (GM Dec. 31, 2021), according to Bloomberg, citing grid operator Kassel, Germany-based Gascade. This means Western Europe will have to rely on already depleted inventories to meet demand, sending prices higher.
In the meantime, several European nuclear power plants are also offline for repairs and maintenance in France, boosting gas demand.
Benchmark European natural gas futures were up for a fourth day on Jan. 6, with the Dutch TTF February contract at €98.15 a megawatt-hour by 4:59 pm (GMT), up 7.242 percent on the day. The February contract had closed at €88.74 on Jan. 4.
European gas prices had jumped to a record high on Dec. 21 following news that Russian gas flow to Germany via a key pipeline had reversed, and had started to flow eastward. The Dutch TTF front-month (January) gas contract had surged to an all-time high of €180.27 per megawatt-hour by the trading day’s close.
However, by close of trading on Dec. 31, the Dutch TTF contract was over 60 percent down on the pre-Christmas high, at €70.34 per megawatt-hour, following news of “a flotilla” of U.S. LNG cargoes heading for Europe.
The next-month Dutch TTF natural gas contract closed at just €17.57 per megawatt-hour 12 months ago (Jan. 6, 2021).
According to RBC Europe Ltd. Associate Director Biraj Borkhataria, as cited by Bloomberg this week, turbulence in European gas markets is likely to persist.
He said global gas benchmarks have been extremely volatile of late, driven by low storage levels across multiple basins and lower LNG output from a number of key exporting regions, albeit partly offset by U.S. LNG exports.
More LNG cargoes are being diverted away from China to Europe, a move that can help ease Europe’s gas supply crunch. According to a Bloomberg report, Europe received 29 LNG cargoes in the second half of December, while another three cargoes were discharging this week and another 28 shipments are expected to arrive by mid-January.
However, Borkhataria believes that the relief may be temporary amid an awakening appetite for LNG cargoes in Asia.
According to Rystad Energy, an Oslo-based independent energy research and business intelligence company, as cited in a Bloomberg report this week, the near-term European gas market sentiment indicates limited upside. Rystad expects prices may find support in depleted European storage and continued concerns over supplies from Russia.
Oslo-based SEB Chief Commodities Analyst Bjarne Schieldrop said in a Jan. 3 note, as cited by a Bloomberg report, natural gas exports from Russia to Western Europe will likely be “significantly reduced” both through Ukraine and Belarus due to sanctions, with prices in the fourth quarter of 2021 being “a guide for what is to come in 2022.”
If Russia were to invade Ukraine, Russia’s Nord Stream 2 pipeline, which has suffered repeated delays (GM Nov. 24 & 19, 2021), would be “likely dead in the water,” said Schieldrop.
However, a fertilizer industry source, commenting to Green Markets on European gas prices and their impact on ammonia and urea production, said care needs to be taken not to use the daily natural gas price as a base for the industry.
“Typically, [ammonia and urea producers] are paying averages of price ranges over a longer period, and with the high fourth-quarter 2021 prices they are now facing potentially higher numbers in the first quarter of 2022, the same way as in the fourth quarter they did not pay the very high spot prices,” he said.
“The producers we are talking to (on ammonia) do not see a downward correction in January, but probably a further increase [due to the above pricing],” the source said, adding that what the production costs of ammonia [and urea] at the end will be for the individual plants is a bit difficult to say.
“Additionally, if the price drop is based ‘only’ on additional supply due to positive arbitrage with other market areas, it is only a matter of time until that tonnage will flow back to Brazil etc. again and leave Europe short/tighter, suggesting we may have ‘a yo-yo’ situation for some weeks and months,” he said.
The European Commission (E.C.) back in the autumn adopted a “toolbox” of measures in an attempt to mitigate the impact of the gas price rise (GM Oct. 15, 2021), including the request to the Agency for the Co-operation of Energy Regulators (ACER) and The European Securities and Markets Authority (ESMA) to report by April 2022 on anti-competitive behavior in the energy market, the functioning of the carbon market, and the enforcement of the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT).
Preliminary reports in November 2021 found that there is no evidence of market manipulation and that markets function in an orderly manner, the Commission said in recent communications.
Under certain conditions, E.U. law allows Member States to aid energy-intensive users in the form of partial compensation for costs linked to Emissions Trading System (ETS), or as reductions of energy levies.
The toolbox centers on support to those most impacted by the energy price surge, by proposing immediate measures such as direct support, tax reductions, or deferral of payments, the Commission said.
In the medium term, the Commission said it will consider measures for a more effective use of gas storage and explore the joint procurement of reserve gas stocks. A new legal framework for gas and hydrogen has just been tabled.
The impact of lower availability and higher prices of conventional fertilizers on this year’s harvest is unclear at this stage, the Commission said. Farmers may respond in various ways, and the Commission said it is following this issue closely.