Geopolitics turns bearish

DEEP DIVE: EU gas bulls are charging towards a big Russian bear

Bullish momentum has once again overwhelmed European gas markets. But this time the rally has nowhere to go, not least because geopolitical events – so often the clarion call of EU gas permabulls – are now conspiring to crash the market.

Prices on Dutch TTF, the European benchmark for natural gas, have rallied 12% since the ‘flash crash’ on 19 September. November-dated TTF, the front-month contract, is currently trading above €39/MWh – a four-week high.

The summer bull run peaked in late August and prices partially retreated in September, but ephemeral factors seem to have revived upward momentum.

Minor disruptions to the end of the Norwegian maintenance season, and a brief early cold snap across much of north-west Europe, are the main drivers.

These events will pass, and there is no enduring or structural change on the horizon to justify continued wholesale gas price hikes. If anything, the opposite is true.

Fears of an early loss of Russian gas transits through Ukraine, a major driving force behind the summer bull run, are already priced in. Consumers have been paying for a possible loss of gas flows into eastern Europe for several months now.

Therefore, any departure from the baseline can only be bearish – and this is exactly how the situation around Ukrainian gas transits is squaring up.

Last week, I described the possibility of a Russia-Azerbaijan gas swap deal to facilitate ongoing Ukrainian gas transits as a “fantasy” (see The Mask Slips). I stand by that view.

However, new information has come to light that suggests Azerbaijan (or perhaps another third party) could feasibly step in to keep Russian gas flowing into the EU.

This Deep Dive explains the political tailwinds behind such a deal, how it could be achieved, and why it could be pivotal for the winter natural gas market outlook.

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