Europe’s Gas Traders Are Watching These Five Drivers This Summer

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(Bloomberg) — Summer has been a slow season for Europe's gas market, but for the third year in a row, it's turning tense.

In a sign of the long-term damage caused by the energy crisis, traders are once again beginning to pay attention to the global risks that could upset the balance of fuel supplies in the region. Foremost among these are potential actions that Russia might take, as well as other events that could disrupt the production and movement of LNG around the world.

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While volatility is nowhere near the highs of summer 2022, the European market has been quick to respond to drivers that could make it difficult to build fuel inventories in time for winter.

EU sanctions on Russian liquefied natural gas

One of these risks is related to the sanctions that the European Union is considering imposing on Russian liquefied natural gas transfers through its ports. Production company Novatek PJSC relies on stops in the bloc to change ships and transport fuel from the Arctic to other parts of the world, and it is unclear how it might respond.

Although the ban has not yet been signed – as member states continue to haggle over the final details of the new sanctions package – the decision is being closely watched because it is the closest the EU has come to clamping down on LNG operations in Russia.

This move could further complicate global shipping logistics. Some experts suspect that this could lead to more Russian LNG remaining in the EU, where it becomes difficult to send it elsewhere. Imports from the country have remained strong since the beginning of the war in Ukraine.

This “may not be the intended effect, but it could have a downward impact on prices,” said Anne-Sophie Corbeau, a researcher at the Center for Global Energy Policy at Columbia University.

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Power outages in Norway and elsewhere

Norway is the largest supplier of gas to Europe now that most Russian pipeline supplies have stopped. This has kept traders committed to warnings issued by the national grid operator, indicating unplanned outages or any changes to planned seasonal business.

Earlier this month, a pipeline fault briefly shut down a huge processing plant in the North Sea, causing prices to soar and indicating how sensitive the market is to such disruptions. In September, a number of annual works will be carried out in Norway, which increases the risks if something goes wrong just before the heating season.

Power outages in other parts of the world would also lead to a stranglehold on the European market, especially if they coincided with heat waves. The United States, a major supplier of liquefied natural gas, is entering hurricane season, which has led to disruptions before.

Gas transit between Russia and Ukraine

Moscow and Kiev currently have a gas transit agreement that allows Russian flows to cross Ukraine and enter Europe. But that deal expires at the end of 2024, which could deprive countries like Austria and Slovakia of about 15 billion cubic meters per year of Russian supplies.

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Austria said it could get gas from other places. However, European officials are pondering how to keep the gas flowing without taking advantage of Vladimir Putin's war machine. One option discussed is for European companies to purchase and inject fuel from Azerbaijan. Any agreement is still far away.

Losses of Uniper Gazprom

Another key question is how German utility Uniper SE and its state owner might be able to claim compensation for damage to Russia's publicly traded Gazprom. Last week, a Swedish court awarded the German company more than 13 billion euros ($14 billion) in compensation for gas that was not delivered during the energy crisis.

Since Gazprom is unlikely to pay compensation – and it barely has assets left in Europe that could be seized – it is possible to redirect payments from European companies that still receive Russian gas, such as OMV AG in Austria. If that happens, Gazprom will likely cut off those flows.

“This is something that could severely impact summer prices if we suddenly lose about 6 billion cubic meters per year under the OMV contract,” Corbo said.

Slower storage containers

Last but not least, the pace of refilling gas storage facilities in Europe has recently slowed. While levels remain well above seasonal averages, inventories act as an important buffer against supply disruptions. Currently, Europe is still expected to replenish these supplies before the heating season begins.

—With assistance from Jonathan Tyrone, John Ainger, and Priscilla Azevedo Rocha.

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