European Gas Market Prepares for Life with no Russian Gas

Front month TTF prices have surged further above the upper 25% fuel switch trigger over the past week following the Russian announcement that issues with an additional Nord Stream 1 turbine would force flow via the pipeline down to 33mcm/d, after restarting post-maintenance at ~63mcm/d. W e believe the cut to 33mcm/d is pretext to avoid normalising NS1 flows back to the pre-June level (1 5 0mcm/d) once the return of the original Siemens turbine is fulfilled. Instead, flows will likely return to the 63mcm/d level, in effect cementing the initial cut as a new baseline level . Further maintenance issues are likely to arise as pretext to avoid increasing exports beyond this level and also at times to cut below this level. As such, no return of NS1 flow above 63mcm/d should be assumed before the winter, and unpredictable flow rates should be expected going forward. Assuming modest demand reductions and 10-year average weather, our modelling suggests Europe will be able to meet both inventory targets and get through a winter with zero Russian gas flow. However, TTF will be required to price for max demand-curtailment to force demand destruction in both the power generation and industrial segments. Indeed, r eviewing forwards, the TTF curve does not return to the fuel switching range until SUM24, implying the requirement for demand destruction for a further 18 months. We currently expect prices to average €173/MWh in H2-22 (€165/MWh in WIN22-23), with a high case at €205/MWh and €195/MWh, respectively . Our forecast is below the current curve as we consider the market to be pricing a more pessimistic view on Russian gas exports to NW Europe than our baseline expectation . Given the large sensitivity of ResCom demand to HDD counts TTF will be highly sensitive to weather forecasts (almost as much as Gazprom telegram posts). If NW Europe can get through the early winter with no significant cold, a portion of the risk premium embedded at the front of the TTF curve may ease . Downside for prices may also come from larger than expected declines in residential demand given the unprecedented increase in household bills amidst a broader cost of living crisis. This could take some pressure off industrial demand curtailments as the market’s primary balancing mechanism.