“Gazprom” turned cold towards Europe

Gazprom’s deliveries to the EU countries through Ukraine began to decrease. The likely reason for the reduction in pumping is the excess of Gazprom’s current contract prices, based on March quotations, over spot gas prices in the European market. At the same time, in early April, spot gas prices began to rise on expectations that colder spring weather in Europe could lead to an extension of the heating season and significantly reduce wind power generation.

The volume of Russian gas supplies through Ukraine for the first two days of April fell by almost 9%. Thus, the application for the pumping of Russian gas to Europe through Ukraine through the Sudzha entry point on April 2 decreased to 37.6 million cubic meters per day, the day before, pumping amounted to 37.4 million cubic meters per day, follows from the message of Gazprom. On average, in March, the daily pumping through this route to Europe amounted to 41.25 million cubic meters, and the total volume of supplies amounted to 1.28 billion cubic meters of gas.

The decrease in supplies is likely due to the fact that Gazprom’s gas has become less economically attractive for buyers in Europe: the formula for the price of Russian gas supplies under long-term contracts is pegged to the average price of the previous month or quarter.

A similar situation was observed in mid-January, when the flow of gas through Ukraine decreased immediately by 40%, to about 24 million cubic meters per day.

Since mid-February, as Gazprom’s contract prices began to converge with spot prices, gas supplies through Ukraine returned to approximately the level of last year – 40-43 million cubic meters per day. According to the contract for gas transit through Ukraine, concluded at the end of 2019, Gazprom must pay for the capacity to transport 109 million cubic meters per day.

After the outbreak of hostilities, transit through Ukraine fell by half, to about 60 million cubic meters per day. Since May 2022, Ukraine has stopped receiving transit gas through one of the two entry points to its gas transmission system on the border with Russia – Sohranivka – citing force majeure circumstances and proposing to transfer all transit volumes to the Sudzha point. Gazprom refused this option.

Sergei Kondratiev of the Institute of Energy and Finance believes that the decline in supplies to the EU is largely due to low demand for natural gas due to high wind power generation and relatively warm weather in Eastern Europe.

“As a result, we see a slight reduction in transit through Ukraine (by 1–2 million cubic meters per day) and through the Turkish Stream (by 3–4 million cubic meters). The price factor also matters: the cost of natural gas under Gazprom’s long-term contracts is now $20–30 per 1,000 cubic meters higher than current TTF spot prices,” he says.

Last week, gas prices moved higher due to a cold snap in Europe and promises of lower temperatures in early April, as well as forecasts of low wind generation. So, in Northern and Central Germany this week frosts are expected at night. As a result, May futures on the Dutch TTF on Friday, March 31, grew by more than 10%, to $540 per 1,000 cubic meters, on expectations that the heating season, which usually ends in Europe on April 1-15, may be longer. Prices continue to be under pressure from labor strikes in France, which have reduced LNG shipments at ports and nuclear power generation.

At the same time, the level of gas reserves in European underground storage facilities is now at historically high levels: storage facilities were 54.9% full as of March 31, which will help the continent compensate for the decline in gas supplies from Russia this year. It is expected that the EU countries will not experience problems with filling them up to the normative 90% by the beginning of the new gas year, which begins in October. In addition, lingering concerns about a sharp slowdown in economic growth in the West and a possible recession continue to put pressure on commodity prices.

Tatyana Dyatel