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Gas prices in the UK and continental Europe tumbled by as much as a fifth on Friday on further signs Russia will increase exports to the region after restricting supplies for months.
Russia’s state-run gas exporter Gazprom said on Friday it had hit its target for filling domestic storage two days after President Vladimir Putin ordered the company to start filling its European storage facilities. The intervention comes after allegations from some analysts that Moscow has stoked an energy crisis by holding back supplies.
The UK benchmark day-ahead contract dropped by almost 20 per cent to £1.39 a therm after trading at record levels above £2 a therm for most of October.
While prices are still roughly three times the level of the start of the year, the sell-off will provide much-needed relief to energy-intensive industries and boost hopes that the drag from gas prices on economies will not be as bad as first feared. Concerns about inflation have also been heightened by the gas price surge, increasing pressure on central banks to consider raising interest rates.
While traders cautioned that prices could quickly head higher again if additional Russian supplies do not materialise in November, they said the signals from Moscow had been enough to stall the months-long rally.
UK gas contracts for delivery in December fell 15 per cent to £1.67 per therm while the European benchmark fell almost 12 per cent to €65.70 per megawatt hour, having traded above €100 as recently as two weeks ago.
“This is all about Russia and the hope that, finally, supplies are going to rise after the games we’ve seen from Moscow this year,” said one energy trading executive.
Gazprom said on Friday it would have completed all domestic storage fills by November 8, the same day Putin said should be the deadline for starting to send additional supplies into Gazprom’s own facilities in Germany and Austria, which have been run down to unusually low levels ahead of the winter.
Traders said the retreat this week was likely to have been exacerbated by macro and trend-following funds that entered the gas market when the rally accelerated in September now exiting their positions.
There are still concerns, however, that Europe is beginning the winter with lower levels of gas in storage than usual and if the weather should be marginally colder than normal, supplies could remain tight, providing support to prices.
Russia has consistently denied restricting supplies to Europe but has limited its exports to those covered by long-term contracts in 2021, and has drained its own storage facilities to levels much lower than normal for the time of year.
“We think the sell-off has probably been overdone as we’re still quite sceptical that there will be a meaningful step-up in exports from Russia before the end of the year,” said James Waddell, head of European gas at Energy Aspects.
Putin has said that if the continent wants more gas, then it should approve the Nord Stream 2 pipeline to Germany, which has faced opposition from the US and eastern European countries that worry it will increase Russia’s leverage over the continent.
Germany’s economy ministry said this week it had concluded that allowing the new pipeline to start would not endanger Germany’s or the EU’s energy security, paving the way for Nord Stream 2 to receive certification by Germany’s Federal Network Agency.
Gas supplies have also tightened globally as economies have bounced back from the pandemic, with Asia paying a premium to attract more cargoes of liquefied natural gas, leaving less to head to Europe.
“Low storage levels and fears of a cold spell have hung over this market,” said Laurent Ruseckas at IHS Markit, a consultancy. “But if Russia is saying it now effectively stands ready that will provide a degree of comfort to the market.”
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