Europe is on the verge of losing a significant portion of its gas supplies, with a key transit agreement between Moscow and Kiev expiring on December 31. Unless an alternative arrangement is reached in the final days of the year, stopping Russian flows through Ukraine will pose a major challenge. A slew of challenges facing an already tight market:
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(Bloomberg) – Europe is on the verge of losing a significant portion of its gas supplies, with a key transit agreement between Moscow and Kiev expiring on December 31. Unless an alternative arrangement is reached in the final days of the year, the cessation of Russian flows through Ukraine will pose a large number of challenges to an already tight market:
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Gas storage
The biggest concern for traders is the pace of inventory withdrawals as European inventories are rapidly depleting. It has shrunk to about 75% full, a level reached a month ago last winter. This is a worrying sign, not only for the remainder of the heating season, but also for fuel storage efforts later in 2025.
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Summer and winter spread
Volatility is likely to continue. Contracts for next summer have recently risen above those for the winter of 2025-2026, which will make it more expensive to replenish storage before the next heating season.
“The market will be challenged to return to comfortable storage levels in the winter of 2025-2026,” Anatole Fegin, chief commercial officer at US gas exporter Cheniere Energy, said earlier this month.
Russian offer
Even with the loss of supplies via Ukraine, Russia can still deliver gas to Europe via Turkey, although capacity on this route cannot fully compensate for the potential shortfall next year.
Russia also ships liquefied natural gas. In fact, the European Union secured a record amount of Russian LNG this year, and while some officials in the bloc have called for a ban, there is still no region-wide ban.
But starting in March, Russian LNG ships will no longer be allowed to use European ports to transfer their cargo to other ships traveling outside the EU. That could mean more Russian LNG remaining in Europe, according to BloombergNEF.
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Competition for liquefied natural gas
Europe will increasingly have to compete with Asia for LNG shipments from global producers. When gas prices fall, emerging Asian markets increase their purchases.
To attract more supplies, Europe could turn to flexible US LNG, which is not destination-specific, Cheniere’s Feigin said.
US President-elect Donald Trump this month called on the European Union to buy more US gas, saying he would impose tariffs on the bloc if it failed to do so. European Commission President Ursula von der Leyen also said US LNG could help replace shipments from Russia.
But many LNG expansion projects around the world, including in the United States, are facing delays. Cheniere’s new Texas project will be “relatively slow to grow” until 2025, Feigin said.
Big bets for hedge funds
Hedge funds have expanded their presence in the European gas market in recent years. They are heading into the end of 2024 with record volumes of long positions – effectively a bet that prices will rise. Many traders have raised concerns that the concentration of such bets could trigger a sell-off, disrupting an already fragile market.
The region’s economy has been slow to recover from the energy crisis in 2022, and continued volatility in gas prices will make it difficult for businesses and households to plan for the future.
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