PIRA: Russia-Ukraine deal takes shape

NYC-based PIRA Energy Group believes that the Ukraine hedge: high global gas stocks emerge outside U.S., while in the U.S., stock build was a hair above consensus, with NYMEX gaining. 

In Europe, final details and credit grabbing hold up Russia/Ukraine deal for winter.

The key short term issue overshadowing LNG markets for winter, both in Europe and in Asia is this question of whether or not high gas storage levels, witnessed across the board, are indicative of weak demand, the weather (Spain, Japan), supply insecurities vis a vis Russia (all Europe) or a supply push from Asia due to the faster and stronger than expected start-up of two trains in Papua New Guinea, which put some 9-bcm/yr. of new supply into the region during its seasonal demand lull.

The EIA’s reported 97 BCF stock build was a hair above consensus amidst a tight range of estimates. Comparisons to both the five-year average and last year also narrowed considerably from last week to ~18 BCF and ~15 BCF, respectively. Despite the slightly above-consensus build, NYMEX futures jumped strongly on the news, with the prompt contract initially posting a ~8¢ gain before closing at ~$3.97/MMBtu.

An almost completed deal among Ukraine, Russia, and the E.U. over gas deliveries this winter appears to be taking on an actual shape. Ukraine is saying “no, no, no” up until the end and Russia is haggling over a final detail or two, but it appears that the current terms for winter supplies will be going through and all that is left is for both sides to take credit for creating the deal and for not being put in the position of accepting a deal offered to them. PIRA continues to emphasize that while a deal between Ukraine and Russia would probably be good for all parties involved, Ukraine’s gas balances are not exactly dire. The country has a sizable amount of gas in storage and is in a good position to replace direct Russian gas imports with indirect Russian gas imports via Slovakia.

In the not-too-distant future, Henry Hub plus X prices will be regularly quoted in Europe and Asia. The influence – if not the outright usage – of the North American benchmark will begin to emerge in late 2015, but a look at the forward curve for Europe and Asia is already instructive.

Press Release, October 2, 2014