My colleague’s view in yesterday’s note seems to have caught the market’s attention. He contemplated that although the outgoing US President allowed Ukraine to use American missiles to strike Russian territories (and so did the UK yesterday), oil installations are most likely off limits. Hence the reluctance of pushing prices significantly higher. In fact, after the release of the weekly statistics on US oil inventories sellers emerged confidently. Although the crude build was significantly below the API projection, the 2 million bbls increase in gasoline stocks exceeded forecasts and went in the face of the API draw. It was possibly due to lower gasoline demand as refiners supplied almost 1 mbpd less of the motor fuel than the week before. The restoration of output at Norway’s 750,000 bpd Johan Sverdrup oil field also acted as an impediment to a meaningful and prolonged rally.

There is lot to ponder and there is a variety of unknown factors, particularly on the geopolitical front, that could trigger sudden elevations in oil prices. Apart from Ukraine, the US veto in the UN Security Council of a resolution that called for an immediate and permanent ceasefire in Gaza did nothing to defuse the tension between the warring parties. Yet, what is observed is that the known ingredients, such as global supply excess pencilled in for next year and the Chinese economic malaise will ensure that any rally based on unforeseen events is brief unless they materially alter the currently more than adequate oil balance. FOMO on unexpected supply disruptions currently does not play a salient role in oil price formation.

From Russia with Love

The confusion and even panic that set in 1,000 days ago when Russian troops set foot in Ukraine were probably nowhere to be seen more tangibly than in the European natural gas market with knock-on effects all around the world. After all, the region relied heavily on Russian gas and vice versa as the old Continent was a salient source of revenue for Russia. Dutch TTF Natural Gas rose from under €70/MWh to €340/MWh by August. The price of the UK natural gas traded on ICE increased fivefold in value as it jumped from 156GBp/thm in February to 800GBp/thm a month later. The CME Henry Hub natural gas contract nearly tripled between February 2022 and August 2022.
A logical consequence of the Ukrainian war and the crude awakening to the perilous dependence on Russian gas was the launching of efforts to severely cut ties with Russian exporters and seek alternative supplies. These attempts were intensified by the sabotage of the Nord Stream pipeline in 2022. The biggest winner was undeniably the US as LNG exports into Europe rose to 56.9 million metric tonnes in the first 8 months of 2024, Kpler estimates. Pre-war, US LNG exports averaged around 15 million tonnes a year, the ship tracker reckons. In addition to the US, Norway, Qatar and several North African countries increased their natural gas shipments to Europe. The move away from Russian gas is neatly exhibited in 2023 data produced by the European Council. The share of Russia’s pipeline gas in EU imports dropped from over 40% in 2021 to about 8% two years later. Russia satisfied less than 15% of Europe’s need for combined LNG and pipeline gas last year.

Yet, shipments have not completely ceased to exist and to a certain, albeit admittedly declining extent, Europe still relies on Russian gas. As a result, any disruption in deliveries, whether for political or logistical reasons, will have an unwelcome impact on gas importers and ultimately on gas consumers. The latest development saw the Russian gas monopoly, Gazprom, stopping deliveries to Austria last weekend. The move followed an announcement from the Austrian oil company, OMV, that it would stop paying for Russian gas in its effort to offset an arbitration award of €230 million over an earlier cut-off of gas shipments to one of its German subsidiaries.

Notwithstanding the halting of deliveries to Austria, Russia is still pumping gas to other European buyers, as confirmed by the Slovak state-owned firm SPP. Yet, the Dutch TTF price jumped from €30/MWh at the end of October to €46.90/MWh on Monday. The price increase triggered a chain reaction and at least five LNG cargoes originally destined to Asia were diverted to Europe in the last few days, once again using Kpler data and as reported by Reuters at the beginning of the week.

The price impact of the spat between Austria and Russia appears to be mitigated by the diverted cargoes but it would be a brazen move to bet on Europe getting through the winter unscathed and with ample supply of gas. Both legs of the Nord Stream pipelines that run through the Baltic Sea are non-functioning. In May 2022 Russia halted supplies via the Yamal pipeline to Poland and through the Gryazovets-Vyborg pipeline to Finland as importers refused to pay in roubles. At the beginning of October, the Ukrainian Prime Minister informed its Slovak counterpart that his country would not renew its gas transit agreement with Russia after it expires on December 31, 2024. The gas pipeline that runs through Ukraine transports Siberian gas to Slovakia where it forks into two branches, to Austria and the Czech Republic.

Whatever Russian gas found its way into Europe, pipeline closures will plausibly limit volumes further. It could still be transported via the TurkStream pipeline to Bulgaria, Serbia and Hungary but its capacity is constrained. LNG suppliers might fill the void. On November 1, gas storage across the EU was estimated to be at 95% of capacity. It is around 100 bcm, the equivalent of one-third of the region’s annual gas consumption. Supply is deemed sufficient, but a colder-than-expected winter could accelerate depletion in stockpiles leading to price jumps, something that might already be echoed in the ICE Gasoil structure where the M1/M7 spread has strengthened from -$2.75/ton to $16.00/ton in the space of slightly more than a week.

Overnight Pricing