• Russian flows into Europe via Nord Stream reduced throughout the month - currently at 20% of capacity
• Heatwave in Europe & East Asia significantly increased demand 
• Global supply of LNG tightened as production has reduced

Market volatility continued throughout July, as concerns continue to persist over the security of gas supply into Europe, on both a short and longer term view. The major concern has come from the certainty of Russian flows into Europe, as issues with Nord Stream 1 persisted throughout the month. Initially operating at 40% of capacity, following complications in a turbine being returned from maintenance in Canada, prompt contracts rallied mid-month when flows were reduced to zero for ten days, following scheduled maintenance. Fears remained that flows would not return following the completion of maintenance, with Germany stating that they did not believe the delay in returning the turbine should have any impact on flows, and that this was being done by Russia, to cause economic pressure in Europe, in response to sanctions imposed by the EU. When flows did return, albeit only at the 40% of capacity level they were at prior to the shutdown, market sentiment was cautiously optimistic, and prices started to soften. This, however, was short lived as a week later Russia announced a further turbine would have to be taken offline for repair, and flows would be further reduced to 20% of capacity, where it still remains.

July also saw the earliest end to the rainy season in East Asia, on record as it was hit by a heatwave, along with large parts of Europe, significantly increasing demand. We also saw global LNG supply tightened as output at the US & Australia (2 of the top 3 LNG producers in the world, along with Qatar) was reduced due to domestic demand along with production cuts in Peru & Egypt. These factors, coupled with the reduced gas flows from Russia have all provided support for pricing throughout the month.

Seasonal contracts have also traded significantly higher throughout July as concerns continue to persist over the certainty of gas supplies into Europe into the Winter period and beyond. Nord Stream 1 flows being reduced, whilst having an impact on prompt contracts due to a tightened supply-demand outlook has had a two-fold impact on Seasonal contracts. Firstly there are the concerns that there will be a physical shortage of gas in Europe over the Winter period, particularly if we see a cold Winter. Secondly, the reduced flows have caused the rate of injections into storage to slow down, and there is now concern that some countries may not hit the EU storage targets of 80% full by 1st November, nor the collective EU target to have EU wide storage 85% filled by the same date. This risk has again provided support to Seasonal prices, which is now starting to filter into the Summer '23 & Winter '23 contracts.

To try to offset this, the EU has agreed a gas reduction plan for all its members, whereby they will attempt to reduce gas consumption by 15% from 1st August - 31st March. However, this is not legally binding and there are exemptions for certain members/industries. If adhered to, however, there is expected to be sufficient gas for the Winter period. 

Market Outlook

Market remains in a bullish trend as supply concerns persist both short term and for contracts across the curve. Although countries across Europe are all looking to alleviate pressure on the gas price by looking at alternate sources of generation, reducing demand, or both, unless there are significant changes to fundamental drivers, these are expected to remain the predominant price drivers. If the reduction in gas demand is adhered to, and alternate sources can be found, we may see prices soften, however, given the current outlook it is unlikely that this will occur prior to the commencement of the Winter contract, in October.

The exception to this, would be if we see Russian flows into Europe significantly increase. As a minimum, we would need flows via Nord Stream 1 to be close to full capacity. Should this occur, it is expected to alleviate the current pressure on the gas system, as well as allowing injections into storage to be ramped up, all of which should have a bearish impact on the Winter price. The UK are also looking to re-open the Rough storage facility, and a licence has been granted to Centrica to begin injections, subject to regulatory approval. Centrica are hopeful that this can begin in time for the Winter period, although it may be too late to affect Winter '22, it should ease subsequent Winter periods.

Clients with forward exposure should consider their risk and budgets and act accordingly. For further information, or to discuss options, please get in touch with your Optimised Energy account manager, or call the number below to speak to one of our experts 

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