This year’s tightness in European gas markets has highlighted the market’s vulnerability to Russian supply. Specifically, Gazprom’s decision not to book for October the full capacity available at one of the main pipelines that delivers gas to Germany poses an increased tightening risk to NW European gas balances and, hence, further upside risk to TTF prices this winter.
These restricted flows, if realized, could further lead Gazprom to physical buying at the TTF hub to help fulfill their contractual obligations for 4Q21 and 1Q22, when demand increases seasonally. This could potentially create a squeeze at the physical hub, further exacerbating the upside to gas prices well above the $32/mmBtu soft ceiling scenario we recently discussed.
While this potentially restricted pipeline flow may be driven by lack of enough supply amidst the need to increase storage injections in Russia, a group of EU Parliament lawmakers have alleged, instead, that the motivation behind it might be to pressure EU regulators to accelerate the certification of the newly built 55 Bcm Nord Stream 2 (NS2) pipeline. Further, the added pressure to the market caused by such a flow restriction can work as an incentive to the signing of additional long-term contracts with Gazprom, much like the recently announced deal with Hungary.
Importantly, Russian government officials have suggested this squeeze of the market can potentially be resolved quickly with the start-up of NS2 allowing for a rapid increase in Russian flows to Europe. In fact, by also proposing to allow Rosneft to send gas via Nord Stream alongside Gazprom, Russia could use this as a work around to the current OPAL regulatory restrictions that require third-party access for an increased utilization of the pipeline. We note the timing of this Rosneft announcement the day after the lower pipeline commitment last week suggests that Russia could provide a potential solution to the ongoing market tightness.
I’m not sure that the geopolitical bunny rabbit, Europe, has any choice.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
