Mallnow flow changes to spur TTF volatility until end of May

LONDON (ICIS)–Uncertainty around reduced Russian gas supplies to Europe via Poland is likely to keep the Dutch TTF gas prompt and near curve volatile until the beginning of June.

Russian gas flows into Germany via the Mallnow border point with Poland have fallen sharply between 22 and 26 May trading sessions.

This is the first such event outside of planned maintenance operations which usually happen in July or August. The next annual works are scheduled for early July this year.

Between 1 March – 22 May, Russian imports to Germany via Poland averaged 55 million cubic metres (mcm)/day. They suddenly fell to 17mcm on Saturday 23 May and slightly below zero since Sunday, as Polish reverse purchases from GASPOOL continued unabated.

The sudden decline coincided with Dutch and German Day-ahead prices reaching all-time lows in week 21. It also comes a week after the of the long-term Yamal transit contract held by Gazprom.

The 30 billion cubic metre (bcm)/year deal dates back to the 1990’s. Amid long-standing political tensions between the two countries, Poland was unphased by the deal’s expiry which meant Gazprom would have to abide by EU rules to flow its gas through the Polish territory.

The Yamal pipeline comes into Belarus from Russia, into Poland and through to Germany.

Significant capacities had been secured at the Belarusian-Polish Kondratki point from June and throughout the third quarter to ensure the continuation of Russian transit via Poland.

Third-quarter purchases at the Kondratki point stand at some 70mcm/day with June even higher at 80mcm/day. Similar amounts were booked at the Mallnow entry point into Germany for second and third quarters.

ICIS understands that in such a low price environment, it is financially unfavourable for Gazprom to book pricier day-ahead or within-day capacities in the limbo period between 16 May – 1 June. Instead, it makes more sense to send any Germany-bound gas via Ukraine, given a daily ship-or-pay contract is already in place with the Ukranian system operator.

Therefore, imports via Mallnow are likely to be more price responsive in the period until 1 June, when the pre-booked capacity period begins.

GAZPROM’S ESP

Gazprom expanded its forward product offering on its electronic sales platform (ESP) this month in reaction to weak prompt prices on the hubs, according to Russian gas analyst Sergey Kapitonov quoted on Twitter. Among the new contracts introduced to the auctions were GASPOOL Year 2022, November ‘20 and Q2 ‘21.

Day-ahead sales to the north eastern German hub dropped by half from an average 10mcm/day in April to just over 5mcm/day from 1-20 May.

The Russian gas company has not updated its ESP results since 20 May due to lockdown measures, a source said. Dutch and German Day-ahead prices reached new lows that week, likely breaching the price floor for Gazprom spot gas. The drop in Mallnow flows maybe a result of Gazprom holding back on ESP auctions in reaction to the low prices, instead pushing them to later delivery periods.

BALANCING THE MARKET

The TTF Day-ahead had risen by around €0.84/MWh from 22 May settlement in early 26 May trade off the back of Dutch H-gas exports to Germany, which were set to rise to 18mcm on 26 May, according to ICIS-collated data. The Netherlands usually imports H-gas from Germany while exporting L-gas.

These flows had dropped off by 27 May, though Mallnow flows were still negative.

From an average 80mcm/day between 1-22 May, Germany has only exported 46mcm/day since 23 May to the Czech Republic to make up for lost Russian flows.

German shippers continued to inject gas into storage, though the daily total dropped off to a weekly low of 37mcm on 26 May. The GASPOOL Day-ahead rose to a €0.40/MWh premium over the front month that day in reaction to the sudden flow change, while neighbouring hubs TTF and NCG settled at a near-flat Day-ahead to front-month ratio.

A trader also said he expected Mallnow imports to rise again in coming sessions. “For me, it was just Gazprom swinging some flexibilities. I expect we’ll have this doubt until June,” he said.

ICIS ANALYST VIEW – Gazprom’s spot floor price

Gazprom’s floor price for spot gas to Europe may have been implicitly been revealed this week, as two rare events coincided forcing the Russian exporter to show its hand.

The expiry of the long-term transit agreement on the Polish section of the Yamal pipeline ended in the middle of May, which – unluckily of Gazprom – occurred at a time when the continent’s gas demand has hit rock bottom.

The recent coronavirus-driven demand destruction has led all suppliers to Europe to reduce flows, as nominations from contract buyers have been reduced as much as possible.

When faced with downward nominations Gazprom’s strategy of the last 18 months or so has been to then offer-up that same gas back to the market at hub-related prices, using the ESP, to ensure flows continue regardless.

But the decision to book hardly any daily capacity on Yamal, to flow gas 22-26 May, implies not only that there was limited demand over this extended weekend, but that spot prices were insufficient to make prompt ESP sales worthwhile.

TTF Day-ahead on Thursday 21 May closed at a record low of €3.10/MWh, with the three-day Weekend on Friday 22 May assessed at €3.563/MWh.

Prompt gas at the main physical trading point within Russia, Nadym, has recently been trading at around €4.15/MWh, highlighting the disparity.

As the release of ESP results data has been delayed, it is not currently possible to check the prompt volumes sold around that time. And even once they are published it will not be immediately clear if low volumes dealt were a function of limited demand as opposed to limited supply.

Nevertheless, whether truly the floor price or not, a rare glimpse of Gazprom’s strategy and operations has been revealed. Tomas Marzec-Manser