Column: European gas prices incorporate low, diminishing Ukraine risk: Kemp

4 minute read

Gas pipes are pictured at Gas Connect Austria's gas distribution node in Baumgarten some 40 km (25 miles) east of Vienna March 6, 2013. REUTERS/Heinz-Peter Bader

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LONDON, Jan 25 (Reuters) - Europe's gas inventories are likely to be sufficient to avoid a disruption to gas supplies and power generation before the end of winter, provided there is no sustained interruption of pipeline gas imports from Russia.

The structure of futures prices implies traders currently see the probability of a disruption to gas supplies as low; expect it would be resolved rapidly; or could be covered in the short-term by increased LNG imports.

The amount of gas in storage in Britain and the European Union (EU28) was equivalent to 473 Terawatt-hours (TWh) on Jan. 23, the lowest for the time of year for more than a decade, according to Gas Infrastructure Europe.

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Stocks have already depleted by 392 TWh over the last three months since their peak on Oct. 21, and inventories are likely to continue falling for another two months, based on experience over the last decade.

Since 2012, the post-winter minimum inventory level has occurred sometime between March 16 and April 19, with the median around the end of March ("Aggregated gas storage inventory", GIE, Jan. 25).

The drawdown from Jan. 23 to the post-winter minimum has ranged from a minimum of 142 TWh (2014) to a maximum of 387 TWh (2018) with a 10-year average of 254 TWh.

Inventories are likely to end the winter very low: the expected end of winter carryover is 220 TWh with a range from 86 TWh to 331 TWh (

At these levels, there is a risk of localised shortfalls putting supplies to domestic users, industrial customers and power generators under pressure.

Under any but the most extreme scenario, however, there should be sufficient inventory at regional level to avert the risk of widespread physical shortages before the end of winter.

And with each week that passes, with temperatures and gas consumption close to normal, the risk of stocks becoming critical before the end of winter diminishes at an accelerating rate.


The calendar spread for benchmark Dutch gas futures with deliveries in March and April reflects traders' expectations about the level of inventories at the close of the winter depletion period.

The March-April spread has narrowed to a backwardation of just 8 euros per megawatt-hour from 45 euros in the middle of December, consistent with the much more comfortable inventory outlook.

The spread would likely have narrowed even further but for the dispute between Russia on the one hand and the United States and its NATO allies on the other over Ukraine.

The spread incorporates a low but non-zero probability the dispute will escalate and threaten the flow of pipeline gas from Russia to Europe.

If the dispute results in the imposition of sanctions by the United States, NATO and the European Union, and Russia responds by threatening or actually reducing gas deliveries, the risk to inventories would rise sharply.

If the Russian government hopes to use gas in its escalation strategy, however, it will need to bring the confrontation to a head soon before the leverage from this source diminishes with the approaching end of winter.

In an effort to calm the market, senior U.S. policymakers have been trying to identify additional LNG supplies to provide an alternative to Russian gas to give U.S. diplomats more space to threaten sanctions.

It is unlikely alternative supplies could be made available on a sufficient scale to cover a sustained reduction in pipeline flows, but the effort is meant to blunt any price spike and reduce this as a form of Russian leverage.

In reality, the effort is likely to fail unless any disruption to pipeline supplies is resolved very rapidly, within a matter of days or at most a couple of weeks.

If the confrontation escalates further in the next 7-14 days, or there are signs economic escalation is becoming uncontrolled, the March-April spread is likely to blow out quickly.

If the confrontation is delayed later into February, and European temperatures remain near-normal, the impact on both spot prices and calendar spreads is likely to be much smaller.

Related columns:

- U.S. gas stocks normalise, warm winter accommodates exports to Europe (Reuters, Jan. 10) read more

- Europe's gas inventories get respite from warm weather (Reuters, Jan. 6) read more

- John Kemp is a Reuters market analyst. The views expressed are his own

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Editing by David Evans

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