Traders Delaying Russian Gas Imports Tap Declining EU Stores

Europe is accelerating withdrawals from natural gas inventories as traders delay imports of Russian fuel poised to fall with oil.

The amount of gas taken from storage sites in the 28-nation European Union rose 44 percent from a year earlier since the heating season started Oct. 1, Gas Infrastructure Europe data showed. Russian flows to most of Europe and Turkey slid 29 percent last month from a year earlier after falling by a quarter in November, according to OAO Gazprom in Moscow.

Russian gas supplies, usually tied to oil prices with a six- to nine-month lag, will be cheaper in the summer as crude’s 58 percent decline since June filters into long-term contracts. The collapse in oil is a “huge incentive” for traders to buy as little Russian gas as possible now in favor of future deliveries, Citigroup Inc. said in a Jan. 20 report.

“It only makes sense to defer receipt of Russian gas, or any gas indexed to oil prices with a time lag,” Zach Allen, president of consultants Pan Eurasian Enterprises Inc. in Raleigh, North Carolina, said by e-mail Jan. 21. “If we see a turn up in oil futures, that market behavior will change.”

Gazprom, which provides about a third of Europe’s gas, shipped 11.5 billion cubic meters (about 406 billion cubic feet) to Europe in December, down from 16.3 billion cubic meters a year earlier, according to the state-owned exporter. Flows are also falling as Europe’s mildest year on record cut demand and sent prices tumbling 28 percent in 2014.

Gas Shipments

EU nations withdrew 29 billion cubic meters of gas from storage from Oct. 1 to Jan. 22, data from GIE in Brussels showed. That compares with 20 billion cubic meters a year earlier. Russia’s flows to most of Europe and Turkey, excluding shipments via the Black Sea, fell about 34 percent in the first 21 days of January from 2014, based on data from Ukraine and European pipeline operators.

“Consumption is low because of the warm weather,” Sergei Kupriyanov, a spokesman for Gazprom, said by phone on Friday. “Customers prefer the storages due to the time lag in the price formula, expecting that they’ll be able to fill in the sites in the summer at a much cheaper price.”

Gas for next-month delivery in the U.K., Europe’s biggest traded market, was at 44.90 pence a therm ($6.75 a million British thermal units) on the ICE Futures Europe exchange in London today. That’s 7.7 percent higher than fuel for delivery in the six months from April.

Withdrawal Incentive

“If the current price is higher than the forward price, there’s an incentive to withdraw now,” Andrew Morris, an analyst at energy consultants Poeyry Oyj, said by phone from London Jan. 22. “Shippers are wary of being in the same situation as last year, having so much left in store at the end of the winter.”

Accelerated storage withdrawals can’t exclusively be explained by the gas contracts’ link to oil, Matthias Prennig, head of energy trading at Gasag Berliner Gaswerke AG, said in a Jan. 23 interview in Berlin. The decline in oil prices is already reflected in gas futures, he said.

“People are trying to avoid a situation like in the prior year, where the storages were well-filled at the end of the winter,” Prennig said. “In addition, at least the first half of January 2014 was significantly warmer than January 2015.”

While U.K. stockpiles have fallen to their lowest since 2011 amid colder-than-normal temperatures this month, European reserves are still the highest since at least 2009, GIE data showed. Current withdrawals are above the 5-year average of 24 billion cubic meters.

Deep Freeze

The “U.K. was in the deep freezer last week while it’s relatively mild elsewhere,” Ole Hansen, head of commodity strategy at Saxo Bank AS in Copenhagen, said by e-mail Monday. It’s “no drama on that front just yet.”

European gas inventories fell to a record low in April 2013, when freezing winter weather boosted storage withdrawals and sent prices to the highest since 2008. Prices, which fell 9 percent this year, may be be prone to spikes if we get a late cold snap this winter, Poeyry’s Morris said.

Russian gas linked to oil “has not reached the bottom yet,” Mikhail Korchemkin, founder of East European Gas Analysis in Malvern, Pennsylvania, said by e-mail Thursday. Russian fuel may drop to $7.5 a million Btu in the second quarter from $9.3 a million Btu now, he forecasts.

“The European importers are looking forward to the price below $7.5 to replenish underground storage facilities,” said Korchemkin. “In summer, Russia’s gas exports may reach a new record on a lower price.”

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