That price level could be an average price of 200 euro/MWh for 2022 or even significantly higher. “Therefore, at a bare minimum we believe that TTF price will have to average at an egregiously high level to force natural gas demand destruction around the world. The reason that demand destruction will be the only mechanism to slow price’s upward momentum is because there are simply not enough molecules in the global LNG market to make up the shortfall of Russian supply into Europe. Given the potential scale of supply reduction, with the only means to soothe what will be an exceptionally sharp move higher in price-a move beyond what has already been seen in the global gas market over the past 6 months-likely to be from government-mandated energy rationing. Price impacts from a combination of both sanction-related and Russian-induced supply disruptions would be the most severe and could mean there is no real barrier to how high prices can initially go. Therefore, Russia only really has two options to deal with a significant reduction of natural gas to Europe: to store it or to curtail natural gas production at the wellhead,” said Chaturvedi. “With the lack of connectivity between Russian gas fields feeding Europe and the Power of Siberia pipeline exporting gas to China, China is unable to take these specific molecules. Similarly, given that energy exports are such an important aspect of its economy, Russia reducing gas flows as a punitive measure to the west, is not the base case. But the low probability currently assigned to this scenario could increase very quickly. Given that the west has seemingly chosen to carve out natural gas exports from the latest round of sanctions, particularly given the already precarious state of the European natural gas balance, J.P. Morgan Research finds it unlikely that the west initiates a supply disruption of this magnitude. This includes flows on Nord Stream 1, Yamal-Europe, through a trio of pipelines in Ukraine, and the second string of Turk Stream which was built to meet European demand. It is also important to note that amid the initial disruption of supply, revisiting a price level above 180 euro/MWh is highly likely-a level reached in late-December of last year amid Russian supply uncertainty and the potential for storage to run out in Northwest Europe,” said Chaturvedi.Īt the moment, the west has taken careful steps to ensure that current SWIFT (Society for Worldwide Interbank Financial Telecommunication) and Russian bank sanctions do not prove to be an obstacle for Russian natural gas exports to Europe.Īt risk in this scenario is as much as 120 bcm of natural gas expected to flow into Europe over the remainder of the year. While this is a substantial disruption, through price, we believe that Europe could attract enough spot LNG to fill the supply gap. “A reduction of 33.5 bcm into Europe over the remainder of the year is quite substantial, accounting for nearly 30% of 2021 Russian natural gas flows into Europe. While it is difficult to surmise the extent of the damage to infrastructure or the duration of the supply disruption, J.P. Morgan Research imagines with combat the likeliest cause of the infrastructure damage, the market would assume this reduction in supply will likely be for a longer duration than witnessed with “normal” infrastructure-related issues. With the current potential for infrastructure damage most likely to occur in Ukraine, J.P. Morgan Research estimates there is likely up to 33.5 billion cubic meters of natural gas (bcm) of Russian natural gas exports at risk over the remainder of this year. J.P. Morgan has identified two other scenarios in which a Russian natural gas supply disruption to Europe could manifest, either through infrastructure damage or from sanctions impacting energy flow: However, market participants have been contemplating the potential for supply disruptions and undoubtedly, the probability of a supply disruption is increasing. “We assume the current geopolitical risk premium now embedded in our 2022 annual price forecast of 81.25 euro/MWh (a result of the potential risk of supply disruptions) would lend to Northwest Europe importing around 18% more LNG year-over-year, as TTF prices are likely to attract more spot cargoes relative to last year,” said Shikha Chaturvedi, Head of Global Natural Gas and Natural Gas Liquids Strategy at J.P. Morgan. J.P. Morgan Research has officially removed the prospect of Nord Stream 2 from its 20 forecast and expects Northwest European storage to exit the year 60% full with key Dutch gas benchmark, TTF prices averaging 81.25 euros per megawatt hour (euro/MWh). Within this assumption, it is expected that Russia will deliver nearly as much natural gas to Northwest Europe as it did during 2021, specifically around 94% of 2021 Russian imports. J.P. Morgan has maintained its base case assumption that Russia would continue to honor long-term natural gas supply commitments to Europe.
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