Page 4 - FSUOGM Week 48 2022

FSUOGM COMMENTARY FSUOGM

ING: Europe faces stiff competition

for natural gas

Ensuring adequate supply in the 2023/24 winter will be the big challenge.

RUSSIA THE collapse in European natural gas prices in the risk is that with the more recent weakness
recent months has created a false sense of secu- in prices, we see demand starting to edge higher
WHAT: rity. While the current winter appears to be more once again, which would only add to the tough
The European manageable, the region will find it more difficult task that the EU faces next year.
Commission has to build adequate storage for the 2023/24 winter. Europe will need to see continued demand
proposed a €275/MWh We see higher prices next year. destruction through 2023 to ensure adequate
price cap on front-month Given the circumstances, Europe could not supply for the 2023/24 winter. This is particu-
gas contracts at the TTF have hoped for a better situation heading into larly the case given the risk that we see further
hub. this winter. Demand destruction and mild- declines in Russian gas supply to the EU.
er-than-usual weather in the early part of the Russian natural gas flows remain a risk
WHY: heating season have ensured that the region has Russian pipeline gas flows have fallen sig-
Brussels is looking to continued to build storage deeper into winter nificantly this year. The latest data show that
reduce the soaring cost – about two weeks longer compared to the five- year-to-date pipeline flows from Russia to
of gas. year average. EU storage continued to grow until Europe have fallen by around 50% year on year
mid-November, reaching nearly 96% full. This is to roughly 58bn cubic metres. And, obviously,
WHAT NEXT: well above the five-year average of almost 88% these flows have declined progressively as we
The proposal could get for mid-November. Given the bloated storage, have moved through the year with reduced
watered down during EU day-ahead TTF prices have fallen as much as flows via Ukraine and Nord Stream. Daily Rus-
member state talks. 93% from the peak in August. This leaves Europe sian gas flows to the EU are down around 80%
in a better-than-expected position for this win- y/y at the moment. Therefore, if we assume that
ter. The next few months should be more man- Russian gas flows remain at current levels upto
ageable. However, it is still vital that the region the end of 2023 (via Ukraine and TurkStream
is cautious throughout this winter, as Europe only), annual Russian pipeline gas to the EU
needs to try to end the current heating season could fall by a further 60% y/y to around 23
with storage as high as possible given the expec- bcm in 2023. And clearly, there is a very real risk
tation of a further reduction in gas flows to the that the remaining flows via Ukraine and Turk-
region next year. Stream will be halted.
Higher prices throughout much of this year In the current environment it is difficult
have ensured a significant amount of demand to see a recovery in Russian pipeline flows to
destruction, and as a result the European Com- Europe. Even if there was the will of both Rus-
mission has been able to stick to its voluntary sia and the EU to restore flows, operationally
demand cut of 15% between August and the end it would be difficult to see flows return to pre-
of March, rather than imposing a mandatory war levels given the damage to Nord Stream 1.
15% cut. Eurostat data shows that in August, EU The only route where we could see a return of
natural gas demand was 15% below the five-year flows is the 33 bcm Yamal-Europe pipeline and
average, hitting the target set by the Commis- increased flows through Ukraine. However, for
sion. Numbers from third-party consultants now, we are assuming no improvement in sup-
suggest that in the months since, demand reduc- ply; if anything risks are likely skewed to more
tions have exceeded the 15% target. However, supply disruptions.

P4 www. NEWSBASE .com Week 48 02•December•2022