Lack of baseload drives Winter 2022 European gas to new lifetime high

Wholesale natural gas prices for delivery into Europe this coming winter have reached new heights, with at first expectations, then the realization of, Russian baseload supply being reduced predominantly driving its dizzying ascent, according to analysis by S&P Global Commodity Insights.

The Winter 2022 contract on both the British NBP and Dutch TTF virtual trading hubs registered new lifetime highs in the Platts Market on Close assessment process July 6, and continued to climb in early trading July 7.

The entire Winter 2022 NBP product was assessed at 430 pence/therm in the MOC process July 6, while its Dutch counterpart was valued at Eur172.125/MWh. These contracts were changing hands at 443 p/th and Eur182/MWh respectively on the morning of July 7, according to trade data supplied to S&P Global Commodity Insights, indicating that gains have not yet been exhausted.

This is a more than sevenfold increase from their respective assessments on the same date in 2021, with the new market environment a world away from anything experienced previously.

The front winter, which still has just shy of three months of trade remaining, is yet to surpass the record for a front season. This was, unusually, set by the summer seasonal contract currently in delivery, with the outright Summer 2022 NBP contract assessed at 479.90 p/th on March 7.

On the instrument's meteoric ascent, the analysis showed four clear upward steps, following four very distinct price spikes, all attributable to four major fundamental events with regard to pipeline supply.

History

Prior to 2021, the record NBP price paid for any amount of gas was 535 p/th, paid for a within-day contract on the OCM market during the "Beast from the East" weather event on March 1, 2018. Market sources reported that it was not possible to enter an offer over 999 p/th on the OCM market that evening.

Since then, the entire NBP front-month prompt contract peaked at 800 p/th on March 7, as part of the many spikes which have characterized the new market environment for European gas. Such prompt sentiment has filtered through into the far reaches of the forward curve as time has progressed.

The foundation for fundamental change was set in 2021, as pipeline supply through Ukraine entered the second phase of the transport accord with Russia, an agreement which already prescribed for lower average transit compared to both 2019 and 2020.

Summer 2021 also saw the end of long-term capacity bookings on the Yamal pipeline, another arterial route for Russian gas into Europe. The annual auction for gas year 2021 allocated no rights, with monthly capacity from October subdued at approximately a third of technical capacity.

Actual transport only held at this level until December, when capacity bookings and transit flows almost completely stopped on the route, and have not returned to baseload supply since.

Fast forward to 2022, the suspension of certification for Russia's new Nord Stream 2 pipeline system on Feb. 22, followed by the outbreak of military conflict between Russia and Ukraine two days later, jolted prices upwards momentarily. Natural gas transit under the existing accord between the two countries continued, however, albeit below contractual capacity amid nomination sensitivity and a force-majeure declaration at the Sokhranivka interconnection in May.

Prices really stepped up and started trading structurally higher in March, as Europe faced a rush to replenish storage by hedging futures without Yamal for the first time.

Most recently, a sharp decline in export through the original Nord Stream dual-pipeline system in mid-June, following a controversial maintenance declaration by Russian gas giant Gazprom, has pushed the front winter unto yet another, higher plane.

Attribution

Wholesale prices have rocketed due to the necessity of purchasing replacement gas on the global market, ushering in a new era of global gas competition.

However, it is essentially the plummeting baseload supply from Russia which has given rise to this necessity. Prior to 2021, wholesale prices above 100 p/th were a rare occurrence, and even then were more likely found on prompt markets.

It therefore stands to reason that Russian pipeline supply kept a lid on wholesale prices, until it was progressively ramped down and left Europe wanting.

In the period between the unsuccessful annual Yamal auction and its reduction of flow, Winter 2022 NBP climbed from 92.85 p/th to peak at 129.50 p/th on Oct. 5, averaging 78.291 p/th in the process.

Between then and the eventual cessation of baseload export, the contract averaged 132.742 p/th, peaking at 330 p/th on Dec. 21. From then until the March prompt spike, the contract averaged 215.043 p/th and peaked at 368.65 p/th on March 8, with a short-lived spike on the outbreak of hostilities in Ukraine.

In the period between March 8 and June 14, the instrument averaged 248.644 p/th, and has subsequently recorded a 347.424 p/th mean since the reduction in Nord Stream exports.

With prices now rocketing following a major reduction in baseload supply, it could well be the case that their restoration is the only way they can now return to earth.