Mild weather, gas supply to cap energy price gains

LONDON (ICIS)–A revised weather forecast predicting lower chances of an extensive cold spell, combined with ample LNG supply and higher storage withdrawals should cap energy price gains over the coming week.

Oil markets were boosted on 3 January due to fears of supply disruptions as part of escalating tensions in the Middle East. This had a knock-on impact on gas and power prices.

On Friday, oil and European electricity and natural gas prices were lifted across the board following news of the assassination of general Qasem Soleimani of the Islamic Revolutionary Guard Corps.

Brent futures had gained $2.47/bbl session on session to trade at $68.72/bbl at 14:00 hours GMT.

The German electricity Day-ahead Baseload price traded at €38.50/MWh, 26% up at 13:30 GMT while the benchmark Dutch TTF Day-ahead gained €0.30/MWh day on day, trading at €12.16/MWh at 12:38GMT.

A stranglehold on the flow of oil would lead to price spikes on crude product and have a ripple effect on gas and electricity products.

The impact of tensions may not impact the transport of LNG since most of the traffic around the Strait of Hormuz is to or from Qatar, a country which has been historically on good terms with neighbouring Iran.

Major shipowners told ICIS they were monitoring the situation (see separate story).

The bullish impact on gas markets of the Iranian tensions was compounded by a sharp decrease in Russian gas flows to Europe via Ukraine.

PLUMMETING RUSSIAN TRANSIT

Transit volumes via Ukraine to Slovakia fell from an average 162 million cubic metres (mcm)/day in December to 17mcm/day on 1 January and further to 11mcm/day on 2 January.

This had a knock-on effect on flows to Austria and Italy. For example, exports at the Tarvisio interconnection point between Austria and Italy dropped from an average 69mcm/day in December to 31.5mcm/day in the first three days of January.

This prompted countries such as Austria to reverse flows from Germany and import 16mcm/day from the country in January, compared to average exports of 6.3mcm/day to Germany in December.

Italy also had to ramp up imports from Switzerland via the Passo Gries interconnection point where flows rose from an average 14mcm/day in December to 31mcm/day in January.

The drop in flows follows the start of a new five-year transit contract negotiated by Ukraine and Russia from 2020.

On Thursday, Sergiy Makogon, CEO of the new Ukrainian gas TSO (GTSOU) said nominations and matching were implemented and noted that Russian producer Gazprom was not nominating higher volumes.

A source close to Gazprom said the reduction may not be ‘intended’.

The Ukrainian TSO said on Friday it was transiting on average 35-45mcm/day to Europe and neighbouring Moldova. It also noted that some of the Ukrainian southern and eastern regions were supplied from stored gas shipped in reverse mode along the transit lines.

It was unclear how long the reduction would last.

WEATHER FORECAST

The impact of the soaring oil prices and Russian gas flow reduction was mitigated by the expected inflow of LNG as 26 cargoes are to unload across European terminals. This is some nine cargoes down on December 2019, but up from an average of 20 in January 2019.

A MetDesk meteorologist said it was less likely that a sustained period of prolonged cold would happen this year.

“I’m certainly not ruling out a cold February altogether, just lowering the chances a bit, say 40%. And with a mild January looking likely in Europe and the UK we may go through this winter rather mild and somewhat devoid of snow,” he said.

In Asia, the Japan Meteorological Agency forecast a 40% probability of above normal temperatures throughout the entire country.

Therefore, the pull of LNG into the Asian pacific due to weather related demand will be muted, keeping Europe as a major offtake market for Atlantic produced LNG.