- News of force majeure on one of the pipelines in Ukraine bringing Russian natural gas to Europe just adds to our conviction that Europe is going to struggle to meet its gas needs over the next year. The heightened competition for gas imports suggests that prices will remain high at least until spring 2023.
- Yesterday, Ukraine’s natural gas pipeline operator, GTSOU, announced that it was suspending the flow of gas through the Sokhranivka transit point, which is currently in Russian military hands. It seems more than likely that there is a political motive but, that aside, it could have a major impact on European gas supply.
- Russia has been reducing gas exports transiting Ukraine for many years, but they still accounted for 26% of Europe’s pipeline imports of Russian natural gas in 2021. (See Chart 1.) Given that the Sokhranivka pipeline carried about one-third of this gas, Europe could lose 8-10% of Russian gas supply. GTSOU said the gas could be re-routed to other pipelines, but Gazprom claimed that was technically impossible.
- It may be the case that the gas is successfully re-routed. However, it is hard to believe that there will not be some disruption to supply. This could derail Europe’s increasingly successful efforts to rebuild stocks ahead of next winter. Gas in storage is now close to seasonal norms (see Chart 2) and LNG imports have soared. (See Chart 3.) Obviously demand is also now very low as the heating season has ended, but high prices will also be encouraging gas consumers to use power as efficiently as possible.
- So far, the market reaction has been very muted. (See Chart 4.) It could be that the improved stocks picture and trough in seasonal demand have allayed market fears of a supply squeeze. What’s more, if Europe achieves its aim to reduce imports from Russia by two-thirds, then this source of supply wouldn’t be needed anyway. Perhaps the key takeaway from today’s news is that natural gas is not off limits as far as the war in Ukraine is concerned, which creates considerable uncertainty about supply over the coming months.
Chart 1: European Imports of Russian Gas (GWh/D)
Chart 2: EU-27 Gas Storage (% of Capacity)
Chart 3: Europe Gas Imports by Source (GWh/D)
Chart 4: European TTF Price (€ per MWh)
Sources: AGSI, Refinitiv, Capital Economics
Caroline Bain, Chief Commodities Economist, 44 (0)20 7808 4055, email@example.com