The European Union (EU) might receive less natural gas from Russia after Ukraine signaled its intention not to renew the gas supply agreement expiring on December 31, 2024. This agreement, signed in 2019, allowed Russia to supply natural gas to EU countries through a pipeline system for five years. Despite tensions in Ukraine, the agreement has remained in effect.

However, with Ukraine's recent indications of non-renewal, the EU might face reduced Russian gas supplies. EU energy chief Kadri Simson has noted that the bloc is also not keen on extending the agreement. Ukraine's gas accounts for 5% of the EU's total gas imports.

According to Aura Sabadus, a senior analyst at market intelligence firm ICIS, Austria, Hungary, and Slovakia may be the most affected by the reduction in imports. This situation could lead to another spike in gas prices, following record-high prices observed after Russia's military actions in Ukraine.

The situation is further exacerbated by Germany's recent decision to unilaterally impose an export tax on gas, complicating efforts to replace Russian imports with supplies from Germany, Italy, or Turkey. Brussels has called for a phase-out of Russian fossil fuels by 2027. The EU has managed to reduce its Russian gas imports by about 70% and increase imports from the U.S. and Norway.

The European Commission has warned that losing Russian supplies via Ukraine could lead to higher transportation costs and make diversification more challenging and expensive due to storage taxes imposed between member states.

Fortunately, Europe currently has historically high gas reserves. Commodity analysts at Standard Chartered predict that EU gas reserves will reach record levels, potentially leading to lower prices this summer. In the first 16 days of February 2024, EU gas demand was 12.4% lower than the same period last year and 18.4% lower than February 2022. However, Standard Chartered has cautioned that some demand may not return, regardless of price reductions.

Meanwhile, weakening demand continues to pressure the U.S. gas market, with Henry Hub gas prices down nearly 30% since the beginning of the year. Despite this, the market started the week with positive signals as natural gas giant EQT Corp. announced it would reduce production to cope with low prices. On March 4, EQT revealed plans to cut natural gas production by about 1 billion cubic feet per day until the end of March 2024, after which it will reassess market conditions to determine further actions.

Source: Vietstock