“Gazprom” is catching up – Newspaper Kommersant No. 32 (7477) dated 21.02.2023

Transit of Russian gas through Ukraine continues to grow as contract prices converge with spot prices on the European market. Now most of Gazprom’s deliveries under long-term contracts are sold at relatively low January quotations. At the same time, spot gas prices stopped declining in anticipation of a cold snap in parts of Europe at the end of the week and due to forecasts of a decrease in wind generation.

Export of Gazprom to Europe through Ukraine continues to grow: the application for pumping through the Sudzha entry point last weekend and on February 20 reached a maximum since the beginning of the year – 39.2 million cubic meters per day.

In mid-January, deliveries through Ukraine fell to another historical low of 24.2 million cubic meters. This was due to a drop in demand for Russian gas supplied under long-term contracts on the part of European buyers. In such contracts, the price formula is usually linked to the average price of the previous month or quarter. In January, prices on the EU spot market fell sharply, which made Gazprom’s deliveries, which at that time were carried out at December quotations, less profitable.

Now, with the normalization of prices, the supply volumes are growing, although they remain significantly lower than before the outbreak of hostilities in Ukraine, when they amounted to 109 million cubic meters per day.

March futures for TTF on February 20 rose by 3% to €50.53 per 1 MWh, or about $555 per 1,000 cubic meters, due to forecasts of a sharp cooling in the EU. “The forecast is colder than before, with more widespread below-normal anomalies now being seen in the West,” according to data from Maxar Technologies Inc. cited by Bloomberg. Colder weather may persist until early March, which could lead to an increase in demand for gas for heating.

The average share of wind generation in EU electricity generation on February 19 was 20.7%, higher than a week earlier. Wind speed is expected to decrease this week in the UK and Germany, which traditionally increases the demand for gas from thermal power plants.

Europe is going through the winter quite steadily, despite the reduction in pipeline supplies from Russia, which was facilitated by warmer than usual weather, which made it possible to delay the start of the gas withdrawal season from underground storage facilities.

The passage of the upcoming winter of 2023/24 will depend on what reserves the continent is left with in April, and on the demand for gas in Asia, in particular in China.

In the meantime, the EU countries are steadily supplied with gas: not only supplies from the Russian Federation have increased, but supplies from Norway have also recovered, the volumes of LNG inflows into the pipeline system of Europe have slightly decreased against this background. UGS withdrawals in Europe were minimal over the weekend, with some countries even experiencing net gas injections, with total reserves exceeding 64% as of February 18, according to AGSI+.

According to independent expert Alexander Sobko, as we move away from the price peaks of late summer – early autumn, deliveries under contracts with averaging prices over a long period will become cheaper, and therefore more in demand. “Nevertheless, the cost of Gazprom’s deliveries so far reflects the higher prices of previous periods, which means that they are slightly higher than the current exchange prices in the EU,” he notes.

Prospects for growth in demand for gas in Europe against the backdrop of lower prices are still ambiguous. Despite the fact that gas prices have fallen, prices for nitrogen fertilizers have simultaneously decreased by 15-20%, Alexander Sobko adds. As a result, European fertilizer producers still need to accurately calculate the difference between the price of a product and the cost of raw materials before making a decision to increase production.

Tatyana Dyatel