Ukrainian gas storage injections hinge on price, not geopolitical risk – traders

LONDON (ICIS)–European gas companies will consider storing gas in Ukraine depending on summer-winter spreads irrespective of the evolution of the Ukrainian-Russian military tensions.

ICIS polled a large number of Ukrainian traders and European shippers active in the country, asking whether the political stand-off would prompt them to withdraw natural gas held in storages or deter them from injecting volumes in Ukrainian facilities this summer.

Interviews coincided with reports on Thursday morning that Russia had ordered its top army command to begin returning the troops. It was unclear if the rebasing order covered all of the 100,000 troops which had been massed close to the Ukrainian border.

Most traders said they were monitoring developments but pointed out that companies which injected gas in storages had already factored in the geopolitical risk and may have hedged their positions accordingly.

An Ukrainian-based shipper pointed out that most storage sites were located in the western provinces, hundreds of miles away from conflict zone in eastern Ukraine.

“We are moderately concerned, but we can’t do much. I don’t expect tanks in Kyiv, but mess in [the eastern] Donbas region yes,” an-EU based trader said.

There were 105TWh (10 billion cubic metres) of gas held in customs warehouse regime at the beginning of the new gas year on 1 October 2020, according to the Ukrainian storage operator, Ukrtransgaz. The customs warehouse regime allows companies to hold gas in Ukrainian storages without requiring customs clearance for three years.

As of 22 April there were 56TWh (5.3bcm) held in customs warehouse regime of which 51TWh (4.8bcm) were held by non-resident companies. Overall, there were 110.2TWh held in Ukrainian storages as of 20 April, according to latest data by the European storage data aggregator, AGSI.

More than 100 non-resident companies held gas in Ukrainian storages as of April 2021, according to the storage operator Ukrtransgaz.

SUMMER INJECTIONS

A smaller number of traders said the situation had raised concerns with their companies’ compliance teams but added that they saw no risk to the gas currently held in storage.

However, some of them pointed out that they may inject gas in Ukrainian storages this summer as a “last resort balancing tool.”

One trader active on the French gas market told ICIS that for European shippers it would make sense considering withdrawing gas from Ukrainian storages as a result of the military tensions on the Ukrainian-Russian border, although he believed there would not be any risk for the Ukrainian storages at the moment.

A trader active on central and eastern European gas markets noted that while he did not expect to see shippers taking volumes out of Ukrainian storage due to the ratcheting up of tensions, they may be deterred from injecting additional volumes during the present gas summer due to the increased risk.

However, most traders pointed out that the biggest factor driving storage withdrawals and injections in Ukraine would be price spreads.

PRICE SPREADS

“For me it is rather the unfavourable market spreads that may prevent companies to store new volumes or roll the positions,” a trader working for an EU-based company said.

“I don’t think people will withdraw gas from Ukraine because of current conditions. It will be more likely due to the fact that May, June and Q3 prices are just cents below Winter ’21 or Q1 ’22 prices.

“Today it doesn’t make sense to inject gas in storage unless you have to supply consumers.”

Currently, the spread on the TTF benchmark Q3 ’21 and Winter ’21 contracts hovers around €0.885/MWh, compared with €5.91/MWh in April 20.

Furthermore, Ukrainian front month VTP gas prices had been trading at a discount to the TTF equivalent largely on the back of lower demand and oversupply.

The spread has been narrowing in recent days, hovering around €0.90/MWh, amid weather-driven demand.

A second trader based in central Europe said the military stand-off had an impact on the Ukrainian hryvnia-euro exchange rate, which meant that gas prices denominated in the Ukrainian hryvnia may have been lifted as result.

The currency has lost 2.78% against the euro since the start of the build-up in mid-March but began to recover ground on Thursday following reports about the Russian rebasing order.

FINANCIAL MARKETS REACTION

Financial markets reacted to news that Russia had ordered its top army command to begin returning its troops which had been deployed close to the Ukrainian border since March.

The Ukrainian hryvnia recovered some ground against the euro, trading at UAH33.57 against the European currency in Thursday’s afternoon trading, after reaching a monthly high of UAH33.78 to the euro on Wednesday.

Serhii Kolodii, head of macroeconomic research at Raiffeisen Bank of Ukraine told ICIS he was cautiously optimistic about the prospect of de-escalation. He noted that the latest geopolitical risk had accounted for a 20% outflow of foreign currency since mid-March.

“For a $200 million [foreign currency Ukrainian] market, an outflow close to $40m is quite important,” he said.

However, he pointed out that compared to 2019, the exchange rate has been stable, despite the recent military tensions.

Some traders said the evolution of the Ukrainian hryvnia as well as fundamental drivers on European markets would determine whether traders would decide to import gas in Ukraine for injections in local storages this summer.

Sergiy Makogon, CEO of the Ukrainian gas transmission system operator, said he was expecting summer imports into the country to pick up in the second half of the injection season.

“Record gas volumes of 10bcm [held by] non-resident companies in Ukrainian underground storage facilities last year testify to confidence in the stable operation of the Ukrainian transmission and storage operators. For its part, the Gas TSO of Ukraine will continue to reliably fulfil its obligations to customers and create new attractive offers for them.”

He said that in 2020, 82 traders booked import capacity from the EU into Ukraine, 52 of which were Ukrainian and 30 non-resident companies.

Sergii Pereloma, acting general director of storage operator Ukrtransgaz added: “From our side, we make every effort to be a reliable partner and provide high-level services. At the same time, we understand the position of traders who insure their risks and are concerned about the stand-off”.

Speaking to ICIS on Wednesday, Peter Dickinson, the Kyiv-based editor of the Atlantic Council UkraineAlert Service said with over 100,000 Russian troops massed in regions bordering Ukraine, it was impossible to completely rule out military escalation.

He said Russia’s deployment of troops may have been an intimidation tactic “undertaken by the Kremlin in order to pressure Kyiv during ongoing peace negotiations and test the resolve of the West, first and foremost the incoming Biden administration.”

“A secondary goal is to provide a distraction for domestic Russian audiences in the run-up to September 2021 parliamentary elections. This opinion is shared by many officials and observers, both in Kyiv and in Western capitals,” he said.