The rise in oil prices from last summer onwards is now filtering through to Russian contract gas prices, while at the same time LNG prices and European benchmarks are falling – making Russian gas less competitive and increasing the likelihood of large volumes of LNG moving to Europe. The trend comes after a period of record Russian gas imports to Europe, coinciding with low gas prices linked to crude’s earlier weakness in 2015 and the first half of 2016.
Rates for Russian fuel at the German border last month jumped the most in seven years, extending their gain since September to almost 50%, according to the International Monetary Fund. This is hitting utilities, which are already under pressure from low power prices. Although Gazprom’s export price increasingly reflects moves in gas-hub rates (with further moves in that direction this winter), a link with crude still dominates, and with the link delayed 6-9 months, the firming of crude since Opec’s agreement to curb production in November, will not be felt until the second and third quarters this year.
The price of gas supplied by state-owned Gazprom at Germany’s border climbed 14% in February to $5.88/mmbtu, the IMF data show, while day-ahead gas on the U.K.’s NBP fell 20% - although forward contracts were better supported.
LNG prices in Asia, the biggest and normally highest priced market, remained on a downward trajectory for a third month as producers fully stocked with supply struggled to place cargoes. Spot prices for April delivery sank to $5.85/mmbtu (below the Russian levels), down 15 cents on the week. May spot LNG slipped to $5.75/mmBtu. Prices in the Atlantic basin are lower still. In a recent Argentine tender, where Shell was awarded the bulk of deliveries, winning bids were estimated at just a 10 cent premium to forward contracts at Britain's NBP.
Gazprom, which supplies about a third of Europe’s gas, expects its prices to continue to recover from a 12-year low in 2016. Most of the exporter’s contracts have an oil link, and some also have minimum and maximum prices indexed to market rates.
If prices do continue to rise relative to imports from elsewhere, then Russia may see its recent export volume growth slow or even reverse. The rising gas prices mean it is less likely that German utilities could bring back previously mothballed gas-fired power stations, and lift demand. And with Atlantic basin LNG prices at just above NBP contract prices, and Russian gas at $5.88/mmbtu, there will be pressure to increase LNG’s market share in Europe at the expense of Gazprom.