Gas prices surged to new record highs earlier this week following reduced flows from Russia into Europe but have since eased off slightly after LNG shipments were diverted away from Asia.
ICIS said front month contracts for January on the National Balancing Point market closed at 450 pence per therm (p/th) on Tuesday (21 December), extending the previous sessions’ all-time high by another 80 pence. The price reporting firm said it was largest day-on-day increase for front month contracts it has ever seen in its assessments.
For comparison, front month contracts reached around 256p/th during the last major price spike in October.
Gas prices have been trending upwards throughout much of 2021 after unusually cold weather during the spring left Europe’s gas stocks depleted at the beginning of summer. The continent then struggled to refill storage sites for the winter due to limited flows through Russian pipelines and an economic rebound in Asia – it’s main competitor for liquefied natural gas (LNG) shipments – following the ending of coronavirus lockdowns.
ICIS deputy editor for European spot gas markets, Alice Casagni, said the latest surge came after the Russian state-owned gas producer Gazprom booked no export capacity from Russia to Europe on the Yamal-Europe pipeline, which runs through Belarus and Poland into Germany.
Casagni said Gazprom has been buying capacity on the pipeline on a short-term basis since allowing a long-term contract to expire in May 2020 in expectation of using the new Nord Stream 2 pipeline under the Baltic Sea, which is still awaiting approval by German regulators to begin operating.
“Gazprom found itself at the beginning of the winter having much less capacity under long terms contracts available than it had in previous years and what Gazprom has been doing has been buying capacity on a really short-term basis, especially through the Yamal pipeline.
“Gazprom started buying capacity first on a monthly basis for October and November and throughout December they’ve been buying capacity on a day-ahead basis on most days.
“But then when they don’t buy that daily capacity that has a massive effect on gas prices because that additional Russian supply is not coming in and the market doesn’t really know what to expect until they get to the end of the gas day and they get the results from the auctions telling them whether Gazprom is going to send gas or not through Poland.”
Although the UK does not import gas directly from Russia, prices in Britain are highly correlated with those in Europe due to the UK’s limited gas storage and reliance on imports from interconnectors with Belgium and Netherlands, Norwegian gas fields and the same LNG shipments for which neighbours are competing.
Speaking to Utility Week on Wednesday (22 November), Casagni said: “Not only is Russian gas not flowing through Poland to Germany today but we actually have reverse flows so a little bit of gas flowing from Germany to Poland.” This was also the case on Monday and happened again on Thursday.
Casagni said prices have also been driven up by colder temperatures this week than were previously expected: “Weather models were pointing to relatively mild December compared with what we had seen in November.”
Prices for front month contracts did drop slightly on Wednesday, closing at around 415p/th according to ICIS, and continued to fall on Thursday morning after LNG shipments previously headed to Asia were diverted towards Europe.
However, Casagni said prices are likely to remain high for the foreseeable future, noting that the Nord Stream 2 pipeline is unlikely to start operating in first half of 2022. On Thursday, Russian president Vladimir Putin denied accusations that gas supplies to Europe are being withheld to put pressure on regulators to approve the politically contentious pipeline, which is opposed by the US.
Ellie Chambers, deputy editor for European daily electricity markets at ICIS, said the high gas prices have fed through to electricity, combining with other issues to push power prices to “astronomic levels.”
Chambers said the UK typically relies on interconnector imports from France and its large fleet of nuclear power stations but warned: “This year, French nuclear plant availability is going to be much lower than usual pretty much throughout winter.
“We’ve just seen 6GW, which is really quite sizeable, of French nuclear units being taken offline on unplanned outage. And that’s going to be a problem in January in particular, so while we are seeing very high day-ahead prices, the most expensive are actually for the front quarter of next year. January and February are very expensive.”
“When it comes to the UK that lack of imports from France means we’re probably going to have to burn more gas than usual and obviously as the gas prices are really high that’s going to really push prices up,” she added.
Chambers said prices are also being driven by forecasts for temperatures and wind output, which were both downgraded on Tuesday: “We’ll kind of have a double whammy there where cold temperatures will push up gas demand for heating, which indirectly affects power prices, and low wind meaning the UK will need to use more of that expensive gas.”
“It also worth noting that temperatures below normal are a massive bullish driver for France, and that will have a knock-on effect on the UK, just because they have a really large amount of electrical heating compared to other markets,” she added.
Chambers said month-ahead power prices for January reached £570.25/MWh on Tuesday – ICIS’ highest ever assessment for front month contracts. She said prices for January have repeatedly broken the records set in October when month-ahead contracts for November reached £282/MWh.
However, prices softened slightly on Wednesday after temperature and wind forecasts were revised back upwards, with month-ahead contracts for January dropping to £539/MWh.
Looking further ahead, Casagni said gas prices for the next summer and winter have also seen significant increases due to concerns that European gas stores will once again be left heavily depleted.
“If we look at the front summer it definitely looks bullish for prices because we are going to get to the end of winter with storage sites well below the previous years’ levels and these will need to be refilled in order to avoid getting to winter like we did this year in which supply was really tight and storage levels were really low,” she remarked.
“Despite prices on the front winter – winter 22 – being really high, if you look at summer 22, it’s trading in most sessions above the front winter which is really exceptional when you think about those market dynamics because normally in summer gas prices are lower because demand is lower.”
Casagni said prices on Tuesday for the summer season were actually slightly lower than for the winter season, although still very close, at 317p/th compared to 320p/th.