PIRA: Russian Gas Supply Cutoff via Ukraine Unlikely to Happen

PIRA Energy Group reports that Russian supply cutoff via Ukraine is unlikely to happen. While in the U.S., the first EIA report of the injection season revealed a paltry 4 BCF build.

The longer term implications of a Russian supply cutoff via Ukraine are so significant that PIRA still believes that it is unlikely to happen, even if now would be the ideal time – low seasonal gas demand and limited risk to Western Europe – to trigger it. If Russia’s mega-investment in pipeline gas to Asia were already built, that would be one thing, but the broader plans for such a grid outlined in this week’s Gazprom Investment Day presentation do not envision such a system until late 2019 at the earliest. The longstanding marriage between European gas demand and Russian gas export revenues is very much alive and well, and with it, a marital compromise will have to be reached with regard to how Ukraine’s debts will be paid in the future.

Paltry Stock Build

The first EIA report of the injection season revealed a paltry 4 BCF build, splitting the uprights between the five-year average 9 BCF build and the year-ago 25 BCF draw. Nevertheless, the indicated figure was well below consensus estimates that called for a build some 10 BCF higher, and was even below the low end of the market’s range. With the report’s lowball number unmasking inherently more bullish underlying fundamentals, the NYMEX prompt contract rallied ~15¢ on the news, erasing early-session losses on its way to an overall day-on-day gain of ~7¢ by settlement.

Jump in Price Volatility Is Emerging in Three Major Markets

In the three major regional gas markets around the world, a noticeable jump in price volatility is emerging after several years of near dormancy. In North America, higher prices are being driven by low storage coming out of winter and in Europe, lower prices are being driven by high storage coming out of winter. In Asia, second quarter spot prices have dropped roughly 20% over the past 90 days and it is all too clear that buyers of choice have replaced buyers of necessity during the seasonal dip in Asian gas demand.