Geopolitical tensions add to European gas market tightness - Fitch

Fitch

© APA | Fitch

# 10 February 2022 10:28 (UTC +04:00)

Low inventories, reduced deliveries from Gazprom and increased geopolitical tensions in the past few months have contributed to the already tight European gas market and prompted the search for additional supplies, Fitch Ratings says, APA-Economics reports.

While Europe will remain reliant on Russian gas supplies in the near term, in the longer term this may lead to a more diversified supplier base and faster energy transition.

The Russian government-controlled Gazprom has been the largest gas supplier to European markets, meeting about a third of the continent’s gas demand. However, the company’s limited supply response to recovering demand and low utilisation at Gazprom-linked storage facilities contributed to significant gas price increases in Europe in 2H21. Although the company has reportedly continued to fulfill its delivery obligations under long-term contracts, it has not offered any meaningful volumes on the spot market. Gazprom pipeline deliveries to the European market have reduced as a result.

European consumers compete with Asia for liquefied natural gas (LNG), while levels of gas in European storage facilities are low, which support high spot gas prices in Europe, despite some moderation in recent weeks from record-breaking levels. Intensified geopolitical tensions, which, among other things, may have delayed certification of Gazprom’s new Nord Stream 2 pipeline, add to gas price volatility and have prompted the search for alternative gas supplies.

LNG and additional commitments from pipeline gas suppliers have helped to mitigate reduced Gazprom deliveries in the short term. However, we only expect moderate growth in global LNG capacity and solid demand growth in Asia over the next couple of years, which may mean that only limited additional volumes become available to the European market. Although the US has ramped up its LNG exports in recent years and there are negotiations to secure increased deliveries to Europe, Gazprom’s normal levels of pipeline supplies to the region are larger than all global exports of US LNG.

Europe’s own gas production has been declining, particularly in the Netherlands and UK, where daily production fell on average by over 40% between 2016 and 2021. The region has only marginal capacity to increase its domestic gas supplies. European markets will continue to depend on supplies from Russia in the near term, given the size of Gazprom’s market share.

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