Ukraine’s New Gas Transit Deal

Last Friday, gas prices increased at the National Balancing Point (NBP). The October 2024 contract gained around 4.8p/therm (0.16p/kWh) due to a sharp drop in Norwegian gas output. Losses from the previous session were regained following news that there was no official agreement on the Ukraine-Azerbaijan gas transit deal.

What does this mean?

Gassco data showed Norwegian gas flows to the UK’s Easington terminal dropped 40.4% from the previous gas day. This is mainly because of the extended maintenance at the Nyhamna gas processing facility.

Confusion around the rumoured Ukraine-Azerbaijan gas transit deal supported contracts towards the end of the curve. With the ongoing Russian war on Ukraine, Ukraine seeks to shift away from transporting Russian fuels and use a different nation. There have been rumours about the same deal potentially being renewed with Azerbaijan, but no official agreement is currently in place. Despite this, an Azerbaijani official has indicated that the country is open to importing fuels from Russia while also exporting their fuels to Ukraine. However, this could create complications for some European countries who are already facing criticism for indirectly supporting Russia’s economy through fuel imports. Regardless, Ukraine must secure a new gas transit agreement before its current deal with Russia expires in December 2024. The confusion surrounding this deal is likely causing the market to increase.

In other developments, only two LNG vessels will arrive at British terminals by mid-October. Despite the low expected supply, storage levels have softened the impact on the UK energy market. Compared to last year gas storage levels are currently about 50% higher.

Summary

This Monday, the market opened on a bullish note, with prices trading 1.25p/therm (0.04p/kWh) above the previous settlement. The key factors behind this sentiment were ongoing maintenance in Norway, which has disrupted gas supply to the UK, and uncertainty surrounding a possible Ukraine-Azerbaijan gas transit deal. Despite these factors, the high gas storage levels in the UK are likely keeping further price increases retained.