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Welcome to the May edition of our Energy Market Insight.

Russia invaded Ukraine 12 weeks ago and the initial energy price volatility has dissipated somewhat as markets adjust to the new normal. Let’s look at what’s happened in the last month, unpick the key market drivers, and examine how Putin may be attempting to “weaponise” gas.

Natural Gas Prices

Since the unprecedented volatility of gas prices in March, the market has been relatively calm and has traded within a tighter range. The table below shows a latest snapshot of prices, and the graph tracks season-ahead pricing since 1stApril:

Pricing gradually trended down across the period, despite a few jitters in response to various news out of Russia. The downward pressure was mostly because of temperatures well above seasonal average, strong LNG volume arriving in Europe, and continued gas flows via Ukraine. European gas storage now sits at around 40%, which is comfortably ahead of this time last year.

The pricing spikes seen in the period were generally short-lived concerns relating to supplies out of Russia. In late March Putin announced Russia would require payment for gas from the EU in roubles, rather than dollars or euros. Prices softened as workarounds were identified, but several European gas companies had to tread a careful path between satisfying Russian demands and breaking European sanctions.

It was unclear whether Putin intended to make good on his threat to cut off European buyers, but on 27th April Gazprom suspended supplies to Poland and Bulgaria. Meanwhile, the EU confirmed that opening a rouble account in Russia to pay for gas would breach sanctions. However, it was eventually agreed that initial payment could be made in euros or dollars via Gazprombank (not subject to sanctions like the Russian central bank) with conversion to roubles happening thereafter.

Fast-forward to 12th May and prices spiked again after Russia cut gas deliveries to a part of Gazprom that is now run by the German state. The Kremlin issued a list of companies that it will cease trading with, however, prices soon fell back as flows out of Russia via Nord Stream, and through Ukraine, remained stable. Russia, it seems, is willing to throw around threats of weaponising its gas but is yet to make anything stick.

Power Prices

Power has continued to follow gas pricing and you will note the similarity between the below graph tracking winter-22 baseload pricing, and the equivalent graph above for gas prices:


Wind generation has picked up in May, reducing the gas-for-power requirement. However, the UK’s combined cycle gas turbines continue to be required to meet peak demand:


With temperatures in northern Europe for the coming period forecast to be around 5°C above the seasonal norm, and UK gas storage now more than 90% refilled, it is expected that upcoming system maintenance at several Norwegian gas facilities will have minimal impact on pricing. However, it will take more than a few warm weeks in May to break the spell Russia’s invasion of Ukraine has cast over European energy markets.

All eyes remain focused on any news out of Russia and, with their economy in deep recession, it seems likely they will continue to seek ways to fight back against western sanctions. Whether the Kremlin could afford to sacrifice income from gas and oil exports seems unlikely, but the markets will no doubt encounter further volatility as this tug-of-war over vital energy supplies continues.



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