Since February, supplies have started to grow again, exceeding, at least a few times, 300 million cubic meters per day
War or negotiations? There is still a formidable army around Ukraine, but Putin seems less belligerent and more open to negotiation. However, the signs remain ambiguous. The withdrawal of some armies, announced by the Kremlin, does not convince the West. “There is no evidence,” say both US President Joe Biden and Jens Stoltenberg, NATO secretary general. “Russia can still attack without warning.” And the same ambiguity can be found on another front of the crisis, that of the energy market.
There is no doubt that part of Putin’s tactic has been to make Europeans even more aware of how addicted they are to Russian gas. With stocks in Europe at their lows, prices exceptionally high, Russia could have sold larger quantities of gas to ease the crisis. But he did not do it because his negotiating strength was increasing, keeping Europe in difficulty.
In January, as Putin was pushing his armies to the Ukrainian border and diplomatic nervousness was nearing its peak, there was – coincidentally – a sharp reduction in Russian gas supplies to Europe. From February onwards, however, observing European gas imports (data made available by Wood Mackenzie, a market research company), a slight change is noted: supplies have started to grow again, exceeding, at least some times, 300 million cubic meters per day – the average, however, although higher in January, remains low compared to previous months. The price of gas, however, has started to fall.
It must be said that Gazprom, so far, has never contravened the agreements with the European energy utilities. He always delivered the gas on time. Simply, analysts explain, it has stopped selling it in the very short term, beyond the contract, as it had done until 2019. There are two reasons: on the one hand, the attempt to force the final approval of the Nord Stream 2, the underwater gas pipeline linking Russia to Germany. Then there is the economic advantage of not putting too much gas on the market: it would bring prices down, damaging Gazprom’s profit which has been very bright in recent months.
Here, however, we must take a step back: until a few years ago Russia was selling gas under contracts with prices indexed to that of oil. It was the European utilities that asked to switch to another type of agreement, this time contracts indexed to the spot price of gas, ie short-term market. A situation that until last year was convenient. This is because the spot price of gas was lower than both oil-pegged and US liquefied natural gas prices. But then Europe was overwhelmed by the energy crisis. In 2021 it found itself with scarce reserves of gas and oil, and at the same time a disappointing supply of renewable energy. With gas prices skyrocketing, and spot-indexed contracts, Russia had the knife on the side of the handle. “He understood that he had a political and economic advantage in not seeing gas beyond what was established by the contracts”, explains Massimo di Odoardo, vice president of the gas sector at Wood Mackenzie.
At this point it is worth remembering a fact: Russia has a dominant position in gas supplies to Europe: it covers more than a third of the annual need and over 40% of extra-EU imports. However, the picture could change if geopolitics remain so tense in the medium and long term and Russia continues to reduce supplies. “With prices still high and few Russian exports, a clear signal is being sent to liquefied natural gas producers around the world to invest more and target the European market,” di Odoardo said.
On the other hand, it is thanks to the whole flow of liquefied natural gas that the situation in Europe is still manageable. Today the gas reserves have improved. Of course, they remain below average, but the level is much more appropriate than a month ago. In December and January, due to mild temperatures and already full storage in Asia, part of the natural gas destined for China, Japan and South Korea was diverted to Europe. He arrived there aboard a fleet of huge tankers. So much so that in January, shipments of natural gas to Europe, at least half from the United States, exceeded gas imports from Russia.
The gas industry moves on a medium-long term perspective, making an investment takes from 3 to 5 years. Over a longer time horizon, the Russian strategy of reducing exports – which at the moment pays off – could be harmful and cause market share to be lost. It is true that Europe needs energy and a lot of gas, but it is also true that Putin cannot do without the rent he gets from hydrocarbons. “Russia must find the right mix between short-term profits and the risk that high prices could harm its market position. If the political situation improves, Putin will want to give a signal by increasing gas supplies ”, concludes di Odoardo. Perhaps the slight increase in exports in February is a first clue.
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