European Pipeline Talks Aim to Maintain Gas Flow Through Russia-Ukraine Pipeline, Potential Drop in Natural Gas Futures Prices

Key Takeaway

• Ukraine expects increased use of its gas storage by European traders, aiming for 4 billion cubic meters, despite security risks.
• European officials are exploring options to maintain gas flow through the Russia-Ukraine pipeline post-2023, potentially using Azerbaijani gas.
• European natural gas futures could drop toward €20/MWh due to high inventory levels and speculative interest in Dutch TTF contracts.

Increased Use of Ukrainian Gas Storage

Ukraine anticipates a rise in European companies utilizing its gas storage facilities by September, despite ongoing Russian attacks. Oleksiy Chernyshov, CEO of Naftogaz, stated, “There might be a physical necessity of using Ukrainian storage” due to well-stocked European storage sites following a mild winter. He added, “Traders are able to take the risk,” highlighting the high cost of storing gas on vessels at sea.

Naftogaz has been actively seeking European customers to boost fuel inventories in Ukraine, despite at least seven Russian attacks on its gas infrastructure in recent months. Ukraine is offering about 10 billion cubic meters in its underground facilities, which is roughly a third of the country’s storage capacity and greater than any other on the continent west of Russia. Traders have been cautious due to security risks and the need for a wide spread between summer and winter gas prices to make storage operations profitable.

Naftogaz aims for traders outside the country to pump at least 4 billion cubic meters of gas into its underground facilities, compared to 2.5 billion last year. The company is in discussions with over 100 firms. Naftogaz officials are in Berlin this week for the Ukraine Recovery Conference, planning to sign memorandums of understanding with Siemens Energy AG for potential cooperation on equipment use and with RAG Austria AG to explore underground hydrogen storage.

European Pipeline Talks

European officials are in discussions to maintain gas flow through a key Russia-Ukraine pipeline, aiming to prevent further damage to the continent’s energy supplies due to Moscow’s war. While Europe has tried to reduce its reliance on Russian gas, several eastern European states still receive it through a pipeline crossing Ukraine. The current transit agreement expires at the end of this year, and most market watchers expect the gas flow to halt.

However, European government and company officials are exploring options to keep the gas flowing next year. One proposal involves European companies buying and injecting gas from Azerbaijan into Russian pipelines heading to Europe. This arrangement would allow Europe to avoid buying Russian gas directly, aligning with efforts to reduce Moscow’s revenues. European benchmark gas prices fell by as much as 2.2% following reports of these talks.

Ukraine supports this idea, as transit revenue amounted to about $1 billion in 2021, providing crucial funding for its war-ravaged economy. Oleksiy Chernyshov emphasized, “Ukraine has incredible infrastructure of transit and storage gas, which should be used.” He ruled out any plan involving Russia’s Gazprom PJSC but noted that bringing gas from Azerbaijan “might have some future.”

Market Dynamics and Price Trends

European natural gas futures, currently around €50 per megawatt-hour, could potentially drop toward €20, a key support level prior to 2021. The recent low of €22.32/MWh in February suggests a possible return to this lower range, according to Bloomberg Intelligence analysis. This lower range could be a low-price cure for European natural gas, which has seen sharp price swings following Russia’s invasion of Ukraine and subsequent efforts by European governments to control prices.

Prices may be poised for a downturn as net-long positions by hedge funds in Dutch TTF natural gas futures reach their highest level in over two years. This surge in speculative interest has raised concerns about potential liquidation, which could push prices below €20 per megawatt-hour. Analysts Mike McGlone and Eddie van der Walt noted that while global competition for LNG cargoes from India, Argentina, and Japan has pushed prices higher, Europe faces high inventory levels, with facilities already more than 70% full early in the refilling period. This situation puts TTF contracts for autumn delivery at particular risk.

Management Quotes

• Oleksiy Chernyshov, CEO of Naftogaz:

  "There might be a physical necessity of using Ukrainian storage by that month, with European storage sites well-stocked following a mild winter. Traders are able to take the risk."