Russia decides against increasing European gas flows, sending prices higher

Vanessa Dezem, Isis Almeida and Elena Mazneva September 20, 2021

(Bloomberg) --European gas prices surged more than 10% as Russia is keeping its grip on the market, opting to cap additional flows to the continent.

Gazprom PJSC opted not to flow more gas to Europe via Ukraine in October, according to the results of an auction on Monday. There were also signs Russian flows via the key Yamal-Europe pipeline will remain limited, with traders booking just a fraction of the capacity offered to flow gas next month into Germany via the Mallnow compressor station.

The cap on additional Russian supplies is leaving Europe starved for the fuel it needs to boost buffer inventories before the winter. With just a few weeks to go before the start of the heating season, storage sites are less than 72% filled, the lowest level for this time of year in more than a decade. The supply crunch also boosted the cost of producing electricity, sending prices up in Germany.

“European gas and power prices continue to trade higher, with gas supplies not showing any signs of picking up,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. “Especially after Russia failed to book any extra capacity for October through its pipelines to Europe.”

Benchmark European gas prices traded in the Netherlands surged as much as 16% to 75.33 euros a megawatt-hour, while prices for next-month in the U.K. gained 16% to 188.10 pence a therm.

Gazprom didn’t book any of the 9.8 million cubic meters a day of capacity offered at the Sudzha network point or the 5.2 million cubic meters a day at Sokhranovka, both on the border between Russia and Ukraine. Traders booked only about 35% of the gas capacity offered for October at Mallnow, where Russia’s Yamal-Europe pipeline ends.

The lack of bookings “will likely force a major year-on-year drop in Russian supply this winter,” James Waddell, head of European gas at Energy Aspects in London, said before the auction.

The gas crisis is sending ripples through the power market, with year-ahead German power, a European benchmark, surging as much as 4.7% to 104.80 euros a megawatt-hour.

High energy prices are also threatening Europe’s economic recovery, with factories curbing output and U.K. energy suppliers going out of business. It’s also adding to concerns about inflation, with euro-area consumer prices rose 3% in August, the highest in a decade.

The bullish factors are stacking up. Flows via Mallnow slumped on Monday in another sign that Russia is keeping its output increases at home and focusing on filling its own storage sites.

Liquefied natural gas tankers are mostly heading to Asia, just as disruptions in U.S. supplies raise uncertainties. The Freeport LNG export facility continued to experience production issues after Storm Nicholas, with its train no. 3 tripped after the restart of the entire facility over the weekend.

“Moving to high price levels is a way of the market to take some of the demand out,” said Tom Marzec-Manser, an analyst for European gas and LNG at ICIS. “I have no doubt that gas will be delivered for those who need it the most, such as residential consumers. But other sources of gas demand might have to step away in the case the market gets really tight during the winter.”

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