European natural gas futures surged to record highs on Monday as the amount of Russian gas flowing into Europe through a key entry point dipped, crimping supplies in an already tight market.
With European stockpiles about 20% below the seasonal average just weeks before the heating season, traders are focused on Europe-bound supply routes for Russian gas and winter demand, said Julien Hoarau, head of Paris-based consultant Engie EnergyScan. Europe will face a very tight winter and an extreme weather event could push prices over 100 euros per megawatt-hour, he said.
Gas flows at the Mallnow station in Germany, which handles Russian fuel from a major transit pipeline, dropped to its lowest in two weeks. Volumes through this route started falling at the end of July and plunged further after a fire at a Gazprom facility in Russia in early August.
Gazprom said Monday it’s meeting in full requests of its European consumers who receive gas via the Yamal-Europe pipeline, which transports the fuel into Mallnow.
Prices also rose as the cost of carbon permits under the European Union’s emissions-trading system surged to a new high, raising the attractiveness of gas as a cleaner-burning fuel in power generation.
Demand in Asia is expected to continue drawing cargoes of liquefied natural gas away from Europe. Industrial production in China and India is putting considerable demands on power generation, much of which is being produced from coal but gas has also been affected, Citigroup analysts said in a note.
Front-month Dutch gas futures gained as much as 4.2% on Monday to record 53.68 euros a megawatt-hour before paring gains to 52.55 euros by 4:34 p.m. London time. Front-month gas in the U.K. rose as much as 3.8% to a record 135.41 pence a therm on ICE Futures Europe.
The market is also on the lookout for signs when the Nord Stream 2 gas pipeline from Russia to Germany starts operations. Flows through the contentious link could potentially ease market tightness ahead of the peak winter season.
The first shipments are expected before the end of the year as the last section of pipe has now been welded and will be lowered onto the seabed, the pipeline operator said in a statement on Monday. The next step will be to connect the Danish and German sections before pre-commissioning works are carried out.