Azernews.Az

By Bloomberg

Three months after Brent crude’s biggest quarterly decline in six years, Europe’s gas markets are starting to feel the impact.

Gas flows from Russia to the region via Ukraine have risen 30 percent since March 31 while Algerian exports to Italy almost doubled, grid data show. The two nations, which together provide more than a third of Europe’s supplies, sell most of their fuel under long-term contracts that are usually linked to crude with a time lag of six to nine months.

The increased pipeline flows are entering a market where reduced demand and more supply via seaborne tankers have damped prices to the lowest for the time of year since 2010. Europe may buy a record-high volume of Russian gas in the third quarter, said Maxim Moshkov, an oil and gas analyst at UBS Group AG in Moscow.

“By the fourth quarter, we expect Russian gas to be well in the money,” May Mannes, head of gas and LNG analysis at Eclispe Energy Group, a unit of McGraw Hill Financial Inc.’s Platts, said by phone from London Thursday. “It takes a while before the drop in oil prices filters through, so assuming Algerian and Russian contracts follow the same pattern, with a nine-month lag, the pressure will come mostly in the fourth and first quarter, which is bearish for prices.”

The price of gas under oil-indexed contracts is converging toward the spot level, potentially ending the hub discount for the first time since 2009, the International Center for Natural Gas Information, or Cedigaz, said Tuesday in a report on its website. The average oil-linked Russian gas contract is already below the August price in the U.K., Europe’s most traded market, Bank of America Corp. said in a report dated April 2.

U.K. gas for next-month delivery lost 2.7 percent this week on the ICE Futures Europe exchange in London. The European benchmark contract has declined 11 percent over the past year, compared with a 47 percent drop for Brent. The crude price fell 39 percent in the fourth quarter, the biggest decline since the three months through December 2008.

Russian Exports

Europe may boost imports of Russian gas by 7 percent this year to 157 billion cubic meters (5.5 trillion cubic feet) as prices drop, inventories fall and the Netherlands cuts production from Groningen, Europe’s biggest gas field, Moshkov said Thursday by telephone. Russian flows will increase 10 percent this year, with the average price potentially falling to $230 per 1,000 cubic meters in 2015 from an average $341 last year, Goldman Sachs Group Inc. said in a report last month.

Russia shipped 196 million cubic meters of gas through Ukraine Wednesday, up from 151 million on March 31, according to data from Ukrainian grid operator UkrTransGaz. Flows climbed to a nine-month high on April 7. Germany imported 111 million cubic meters of Russian gas via the Nord Stream pipeline under the Baltic Sea Tuesday, an 11 percent increase from end-March, data compiled by Bloomberg showed.

Algerian Supplies

Algerian flows to Italy rose to 23 million cubic meters Wednesday from about 11 million on the last day of March, according to Italian grid manager Snam Rete Gas.

Russia’s gas sales to Europe are controlled by OAO Gazprom, while Italian oil company Eni SpA has a long-term deal with Algeria that expires in October. Most of the deals are take or pay, meaning buyers have to pay for most of their gas even when they don’t import.

“Russian and Algerian gas flows did get a boost from April 1 as we are entering a new quarter that takes into account, for a longer time, a low Brent price,” Thierry Bros, an analyst at Societe Generale SA in Paris, said by e-mail Thursday. “I also expect Eni to take advantage of this situation to try to call as much as possible of its already pre-paid gas.”

Spain’s imports of Algerian fuel jumped 88 percent on Wednesday compared with March 31, according to data from the European Network of Transmission System Operators for Gas, or Entso-g, compiled by Bloomberg.

Russia had 37 long-term contracts to export a maximum of 202 billion cubic meters of gas a year to Europe last year, while Algerian deals totaled 24, with maximum flows at 61 billion cubic meters a year, according to Cedigaz estimates.