Following on from last week’s discussion of LNG deliveries to the UK, this week we’ll take a look at Russian gas exports to Europe.
Withdrawals from gas storage across the Continent accelerated and stocks depleted much quicker than in previous years. French nuclear generation problems and increased use of gas over coal had also increased gas demand for power generation in order to meet the higher demand. Gas supplies from Russia helped to fill part of the void left by the lower LNG.
Russian gas flows
Russian exports to Europe in 2016 averaged 179bcm, representing almost a 20% increase on the recent historical average of around 150bcm. The increase in the Russian flows is partly due to the influence of the crude oil market. Russian gas contracts maintain a link to the oil price, and price movements in oil are reflected in the price of gas supplied 6-9 months later.
Oversupply in the oil market had pushed Brent crude prices below $40/barrel during the first quarter of 2016. These low oil prices fed into the gas market later in the year. Shippers were then eager to purchase as much gas as possible, while the gas contract reflected the low oil prices from Q1 2016. Since then oil prices have risen more than 70%. This rise will lead to more expensive gas contracts through 2017, which could have an influence on the level of Russian exports to Europe this year.
In previous cases, buyers have reduced flows while waiting for oil-linked prices to fully reflect lower oil prices. This can be seen in the graph by the very low take of Russian gas in the early part of winter 2014. After oil prices began to fall sharply from June 2014, gas buyers waited around nine months until the drop was reflected in gas prices. This then triggered a sharp jump in exports, as can be seen in the graph below for March 2015.
With new LNG production facilities in Australia and the United States, the potential for oversupply in the global gas market, could push more Qatari LNG tankers to Europe while Asian demand is serviced from elsewhere. It remains to be seen how Russian gas production will respond to this new competition. Recent production cuts as part of a deal with OPEC have reduced oil revenues, and Moscow now faces an impending reduction in revenue from gas sales. Either it loses orders in competition to LNG or the excess supply drives down prices, thus reducing overall revenue.