A recent unplanned outage in Norway has highlighted how the European gas market remains exposed to supply shocks despite high levels of storage.

WHAT: The front-month TTF contract rose to a six-month high last week. 

WHY: The price spike was caused by an unplanned outage in Norwegian supply.

WHAT NEXT:  Europe remains on track to refill its storage facilities before the start of winter, but there is continued volatility before of the risk of Russian gas transit through Ukraine halting at the end of the year.

 

The front-month gas contract at the Dutch TTF hub spiked at a six-month high on June 3, on the back of unplanned maintenance in Norway. This followed a previous rally that began in late May because of the risk that Gazprom might cut off gas supply to Austria’s OMV. However, Europe remains on track to refill its gas storage facilities well ahead of the heating season.

The July TTF contract exceeded €36 per MWh ($412 per 1,000 cubic metres) on June 3 – its highest level since early December, and up from less than €30 per MWh in mid-May. A pipeline cracked at Norway’s Sleipner riser platform, restricting Norwegian gas supply to Europe. But prices receded during the following day after it was confirmed that the outage would only continue for a few days.

The price spike highlights how vulnerable Europe remains to supply shocks, despite being over the worst of the energy crisis. Norway is now the EU’s top gas supplier, having replaced Russia in the role in 2022 because of drastic cuts in Gazprom’s deliveries.

"Surging gas prices across markets last Monday tell a story of vulnerability worldwide,” Rystad Energy analyst Christoph Halser said in a note. “In Europe, prices shot up due to issues at Gassco-operated Nyhamna processing plant in Norway, while in Asia, brutal heatwaves strain energy systems relying on gas.”

At the same time, the US is seeing high temperatures in the Southwest, which has also boosted gas-for-power demand despite a temporary dip in gas output, he said. 

“These events highlight how sensitive interconnected gas balances can be."

 

Austria faces Russian supply risk

Prices have been more elevated in  Europe since late May, when OMV warned that gas supply from Gazprom could be halted in relation with a foreign court ruling, without identifying the case. The group said it had found out about the potential suspension through a ruling obtained by a major European energy company, which it did not name. It added that it would be able to find replacements to cover the lost Russian supply, including Norwegian gas and LNG.

The lawsuit in question may be the one filed by Germany’s Uniper, which resulted in the seizure of Gazprom Export accounts in Luxembourg, according to sources who spoke with the Moscow-based Kommersant newspaper. Analysts surveyed by Kommersant believe that such a court ruling may extend to other buyers of Gazprom's gas in Europe, and Gazprom itself risks losing up to $1.35bn-$1.45bn in revenues on OMV contracts.

Gazprom Export has a contract to supply OMV with up to 8bn cubic metres of gas annually until 2040, and the company delivered about 4.82 bcm in 2023. Based on the average price of supplies to the European market, Gazprom could lose about $1.35bn-1.45bn in revenue.

European storage levels are comfortable, with almost 80 bcm of gas in stock, representing 70.6% of capacity, on June 3. That has since increased to nearly 72%.

Norwegian gas flow was down 4.6% week on week at 263.5mn cubic metres per day in the seven days ending June 4, according to Rystad, while Russian pipeline flow dropped 7% to 95.3 mcm per day. Russian supplies have been growing steadily for most of this year, though, with deliveries amounting to 2.5 bcm of gas in May, up from 1.8 bcm in the same month last year and up 28% since the start of the year.

This and muted gas-for-power demand caused LNG deliveries to Europe in May to slump to their lowest level in two years, down 7.4% month on month at 8.52mn tonnes, according to Rystad. The continent’s gas-for-power demand dropped 26% year on year to 6 TWh, the consultancy said. 

 

Policy movements

As for policy developments, the German government announced on May 30 it will eliminate its levy on natural gas exiting the German grid at border interconnection points in 2025. The move has been welcomed by EU authorities and some of Germany’s central and eastern European neighbours, which have complained that the levy undermines bloc energy solidarity and undermines efforts to diversify away from Russian gas. Countries in this region still dependent on Russian gas can access imported LNG through Germany as well as supplies from the North Sea area.

The levy had been established earlier to recoup costs Germany accrued in filling its gas storage sites since the 2022-23 winter season. At its highest point in April 2023, the levy amounted to 8% of the cost of gas at Germany’s Trading Hub Europe (THE) platform.

Meanwhile, it remains to be seen whether the European Commission will get all member states on board with a ban on Russian LNG transhipment. Brussels wants to include the measure as part of its 14th package of sanctions against Russia. It would impact the reloading of Russian LNG at EU ports, which would further constrain Russian shipping capacity. Russia uses specialised icebreaking LNG carriers to transport LNG from the Arctic and then reloads the cargoes onto standard LNG carriers in Europe for onward delivery to other markets. The proposed ban would further drive up shipping costs and limit vessel availability. It will not impact Russian LNG import into Europe, however.

The commission insists that this will not impact LNG supply to Asia, but any measure that reduces Russian LNG supply to the market and increases its cost will inevitably affect buyers. In any case, the ban will not get introduced unless it is approved by all member states, and Hungary has already indicated that it will oppose the move.

 

Ukraine gas transit

While Russian gas flow to Europe is now only a fraction of the pre-war level, it still accounts for a sizable chunk of the overall supply to the market, and so further cuts could still trigger a large price spike. 

A disruption may occur if Moscow and Kyiv do not extend their deal on Russian gas transit to Europe through Ukraine, which is due to expire at the end of this year. Ukraine’s government insists it will not seek a renewal, and the European Commission – which played an instrumental role in brokering the current contract in 2019 – has said it does not see an extension as necessary.

Hungary, Slovakia and Austria still receive significant quantities of Russian gas, primarily through Ukraine. If the deal is not renewed, they will have to find alternatives. Austria could import from Italy and Germany, while Hungary could expand Russian shipments via the TurkStream pipeline, and Slovenia can source more gas from Algeria and other places.

On the other hand, European gas buyers could group together to negotiate the purchase of gas at the Russia-Ukraine border after the deal’s expiry, while also assuming responsibility over its transit through Ukraine.

Regardless of what happens, the uncertainty is already placing upwards pressure on gas prices, which are still elevated compared with historic norms, despite conditions on the market improving over the past year.