Supply shocks in Europe push Hungarian gas market into limelight

The Hungarian natural gas market is gaining more prominence in Europe, with its stable supply of Russian gas via the TurkStream pipeline enabling the country to play a more active role in the Central and Eastern European gas balance.

Hungary's strategic position in the gas market is further underscored by the uncertainty around Russian gas flows via Ukraine into the region, albeit constrained by capacity limitations.

The breakout of the Russia-Ukraine war in 2022 spurred a supply shock, affecting the European gas market broadly and particularly the landlocked countries of Central and Eastern Europe, that have come to rely on price-competitive Russian gas flows sent via Ukraine for large portions of their gas burn.

Hungary exemplified said dependency, with 95% of its gas supply coming from Russia in 2020, according to the International Energy Agency.

However, Hungary's close relations with Russia continued to form the bedrock of the country's gas supply security, as the country benefits from an alternative supply route for Russian gas, the TurkStream pipeline.

The TurkStream pipeline allows Russian volumes to flow into the European Union via Turkey, remaining key for the country's energy balance, which market participants expect to stay in place.

With Russian pipeline flows into the EU via other routes largely curtailed or significantly reduced, gas imports to Europe via the TurkStream pipeline rose 54% year on year in the first half of 2024, the Gas Exporting Countries Forum said July 16.

"[There is] not a lot of risk to have [TurkStream] supply curtailed," a source within Central and Eastern European gas market said. "Hungary will do whatever it takes to continue offtaking Russian volumes.".

The Hungarian gas market, already aiding its neighbors, such as Slovakia and the Czech Republic, with flows to the former amounting to 2.36 TWh over the month of July, data from Slovak TSO showed.

Hungary's crucial role

The option to continue taking gas via the TurkStream pipeline becomes even more crucial for the region as market participants closely watch the fate of the Russian gas transit via Ukraine, with the transit agreement between the countries set to expire at the end of 2024.

S&P Global Commodity Insights analysts' base case on the future of the Russian gas transit was updated in May, with the cessation of Russian flows via Ukraine reclassified to "more likely than not." Previously, the S&P Global analysts assumed the flows would continue.

Russian gas transit via Ukraine currently adds around 15 Bcm per year to the European gas balance, primarily supplying Slovakia, the Czech Republic, Austria and, to a lesser extent, Italy. As the competition for gas among said hubs intensifies, Hungary stands uniquely well-supplied to reduce supply risks in the region.

Given the rising importance of and the growing interest in the Hungarian gas market within the region, underscored by a growing liquidity on the Hungarian MGP hub, Commodity Insights began assessing the Hungarian Virtual Trading Hub's day-ahead, month-ahead and weekend contracts, effective July 18.

Short-term oversupply challenges

While it is increasingly becoming important, the Hungarian gas market's growth faces challenges due to infrastructure capacity limitations.

Market sources in the region said that interconnection capacity with many of the country's neighbors has been booked through end-2024, as landlocked Central and Eastern European countries with less favorable geographic positions rush to fill their storages ahead of the upcoming gas winter.

As a result, the Hungarian gas market remains oversupplied, with approximately 0.4TWh of natural gas more in its storage on August 18 than a year ago, while the EU as a whole was down 8.9 TWh on the year August 18, data from Gas Infrastructure Europe shows.

The market remains bearish, with prices depressed due to "high storage sites, lower consumption, high and stable flows on TurkStream," according to the Central Easter European Gas Exchange report released July 17.

"[I] still see MGP quite oversupplied for balance of summer," a Hungarian gas trader said, expecting "discount to TTF to be kept in the range 1-2 euros."

Looking ahead, Commodity Insights analysts expect an increase of CEE's reliance on its own storage next winter and in turn its refill needs in the summer of 2025.

Regional players, including Hungary, are currently working on initiatives to boost interconnectivity between Central and Eastern Europe and the Balkans, with the most notable project in the works being the Vertical Corridor, a pipeline between Greece to Bulgaria, Romania, Hungary, Slovakia, Moldova and Ukraine.

Diversification efforts

In August 2023, Hungary's MVM signed a contract with Turkey's Botas to secure additional gas volumes delivered to the country in 2024, according to a press release from Botas.

At the Croatian island of Krk, a floating LNG terminal under the same name currently operates at an expanded annual capacity of 2.9 Bcm, up from 2.1 Bcm/year from 2021, with substantial volumes of regassified natural gas making their way to the Hungarian gas system.

The terminal will nearly double its capacity by 2025, reaching a throughput of 6.1 Bcm. This planned expansion is designed to bring more optionality for the CEE buyers, at the cost of increasing their exposure to the global LNG market.

Further ahead, a large underwater gas field Neptun Deep in Romania's Black Sea is expected to come online in 2027, with one of its developers, OMV Petrom, estimating the field's reserves at 100 Bcm.

These projects are set to further entrench Hungary's strategic position in the region's natural gas market in the second half of the 2020s.