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Although prices for ICE natural gas futures came down this week from the sky-high point they reached in October, the frictions that led to the initial spike are still in place and are likely to stay.

UK natural gas futures prices multiplied more than five-fold in the last six months – nearly hitting 300 pence in October from around 50 pence in April – as Europe struggled to find a way out of a conflict with Russia, its main supplier, over regulatory approval for the Nord Stream 2 pipeline. At the start of the week the ICE December gas contract dropped to 156 pence on indications that Russia may reopen its taps, but for the moment the gas is not flowing west. European reserves are at such a low level that there is a real treat to supply cuts.

Why there is a squeeze in the gas market right now?

Russian gas makes its way into Europe via four main routes: the Yamal pipeline through Belarus and Poland; the Blue Stream and TurkStream pipelines via Turkey; through Ukraine, and using the North Stream 1 pipeline under the Baltic Sea. Of those, North Stream accounts for around 40% of all Russian gas coming into Europe.

Over the weekend North Stream 1 gas for Germany was diverted into Poland leaving Germany with zero flow. Similarly, Russian supply via Ukraine has dropped below prescribed capacity.

Russia’s gas monopoly Gazprom is in the process of filling up its own underground facilities, storing gas in order to be able to supply Europe for the rest of winter and into March. Although it has already reached the levels of storage that exceed what it exported last winter the company will keep on filling its stores until November 8.

Why is Russia messing with the gas supplies?

Industry analysts believe that Russia has the capacity to pump about 15% more gas into Europe but given the current sour grapes over the North Stream 2 pipeline is unlikely to do that until next week.

Prices this morning are 40 pence higher at 196.

The pipeline, which also runs under the Baltic, was built by a consortium led by Gazprom but during construction the US imposed sanctions on the companies involved in the project. Germany managed to broker an agreement but now further construction is awaiting green light from German regulators.


Southern Europe has gas supply problems too

Europe has also other supply problems, notably with gas from North Africa into Spain and Portugal. Algeria provides over 65% of the gas imported into those two countries but as a 25-year supply contract came to an end on 31 October the Algerian president ordered the supplies via Morocco to stop over a long-simmering diplomatic dispute between the two countries. As an alternative Spain may end up using carrier ships to import liquefied natural gas from Algeria but this will add to the cost of the commodity.

“In fact, gas supply across the globe is a real issue, with relatively few major gas-producing countries. Furthermore, investment in new gas facilities has fallen back in recent years. For the UK, whose North Sea gas resources are diminishing, Norway is the pivotal supplier. Gas demand, post the COVID-19 recovery, is satisfied by what has become a seller’s market,” said Nigel Hawkins, Hardman & Co Infrastructure and Renewables Specialist.

It may seem crazy to the man in the street that gas prices could go up even further, but with the weather getting colder and European markets looking at some severe shortages, there does not look to be much downside in this market. Russia would have to change its tune on supplying Europe and we don’t see that happening anytime soon.

Explore Natural Gas ETFs

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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