A combination of factors this week and last have put a massive squeeze on crucial natural gas flows to Europe, sending prices sky-high.
Dutch front-month NatGas futures, the European benchmark, jumped as much as 24% Thursday morning, adding to the 46% increase this week and last. Flow reductions began last Wednesday when an explosion rocked the Freeport LNG Terminal in Quintana, Texas. Most LNG exports from that facility end up in Europe as the continent weens off Russian supplies.
Rapid shifts in the supply dynamic have sent US NatGas prices tumbling (though rising Thursday morning) while EU NatGas soars.
This was followed by news Tuesday that state-controlled Russian energy giant Gazprom said flows to Europe were restricted after Canadian sanctions over the war in Ukraine prevented German partner Siemens Energy from delivering a gas turbine that powers a compressor station on the pipeline that was recently overhauled.
Then on Wednesday, Russian NatGas deliveries through Nord Stream to Europe dropped and are expected to decline by around 40% this year.
Prospects of Europe running out of Russian NatGas are increasing as flow reductions have been reported by companies including Eni SpA, Engie SA, and Uniper SE. Germany calls the reductions through Nord Stream "politically motivated" by Moscow.
Utility Uniper said Wednesday it had received 25% less than contracted from Russia, while Austria's OMV AG and France's Engie also got lower volumes. Italy's Eni said Gazprom was providing only 65% of the requested amount on Thursday. -Bloomberg
What's exacerbated the energy crisis in Europe is the attempt to ween itself off Russian fossil fuels and monetary tightening by the central bank, sparking what could be signs of stagflation.
The Kremlin released a statement Thursday, indicating the recent cuts through Nord Stream were "not deliberate."
Hungary has been the latest country to break ranks with the EU to accept Moscow's demand to pay in rubles for NatGas. However, Poland, Bulgaria, and Finland have rejected such a scheme which forced Moscow to halt shipments to those countries.
Russia tightened its grip on European energy markets. It forced the German energy regulator to advise customers this week to reduce consumption so that storage sites could be refilled before summer officially starts.
Between Russian supply cuts and Western sanctions on Russia preventing key equipment from being installed on Nord Stream, total cuts through the pipeline have been about 60% to 65 million cubic meters a day. Factor in the prospect of LNG import disruptions from US' Freeport, and the supply outlook in the EU becomes more bearish as gas demand for cooling soars with summer just days away, which means delays in filling inventories could be lead to a harsh European winter.
"Gas prices will continue in the winter to be very high," Marco Alvera, former chief executive officer of Italian network operator Snam SpA said at a conference on Thursday.
"Winter gas prices will be high, winter power prices will be high."
BCS Global Markets NatGas senior analyst Ron Smith said further disruptions to LNG flows to Europe, such as another Freeport incident, could send EU NatGas prices up "another 50%."