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Germany has halted the certification process for the Nord Stream 2 gas pipeline after Russian president Vladimir Putin recognised the separatist regions of the Luhansk and Donetsk provinces in eastern Ukraine as independent republics.
Responding to the announcement on Twitter, former Russian president Dimitry Medvedev warned that the decision would “very soon” lead to a doubling of already high European gas prices.
However, speaking to Utility Week on Tuesday (22 February), ICIS market analyst Alex Froley said the response on the wholesale market so far has been relatively muted compared to other recent surges: “The front-month prices picked up this morning when the news about the Nord Stream 2 pipeline being put on hold was announced, but they have fallen back down again, and if you compare them to the big spike in December, they weren’t as high as that.
“To give you an example, the UK NBP front month contract opened this morning at 188 pence per therm (p/th). After the news about Nord Stream, it went up to 197p/th and then this afternoon it’s actually come back down to 192p/th. We had a little surge in gas and oil prices on the news, then they’re dropped back again to fairly close to the open so there’s not actually been an immediate long-standing increase in prices.
“If you compare to where we were in the middle of December last year, the front month was at 417p/th so that peak a few months back was twice as high as where we are now. That said, gas prices are still much, much stronger than they were a year ago. This time last year it was around 50p/th so we’re still four times that.”
Froley said the impact of the announcement was limited because traders were not expecting Nord Stream 2, which runs from Russia to Germany under the Baltic Sea, to begin operating any time soon anyway.
He said traders are more focussed on flows through the existing pipelines: “It’s still very early to see how this situation will develop but if you look at the pipeline flows from Russia to Western Europe at the moment there’s been no real change in the pipeline flows so the fundamentals of supply and demand haven’t particularly changed at the moment.”
“Obviously if the political situation changes, if the conflict escalates further, if flows through pipelines stop, then things could become very different, very quickly.”
Froley said the latest movements are typical of what’s been happening throughout the season: “Gas traders have been watching the situation very closely throughout the whole winter and every time there’s a bit of news or a new development, you see volatility in the market – it will jump up, it will fall back down.”
He said even if there is no further escalation, gas prices are expected to stay high throughout the rest of this year. Gas stocks in Europe will be heavily depleted by the end of winter, meaning demand will remain strong over the summer as storage is replenished, and “everyone will be nervous for next winter” with a “quite a premium” built into prices.
“Looking across Europe as a whole we see stocks about 25% full currently,” he explained. “That’s pretty much the lowest that we’ve seen in any recent years.”
Froley said the previous low was in 2018 when storage was 29% full at the time of year. In a “good year” this rate could be as high as 60%.
“One thing that politicians in Germany are starting to debate is should they actually have some legislation to ensure that storage is filled up properly over the summer,” he added. “In Italy, there’s a stricter storage regime and companies are obliged to put certain amounts into storage over the year”.
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