Invgesting.com — UBS Global Research in a note Thursday attributed the recent rise in European prices to escalating geopolitical tensions rather than underlying market fundamentals. Prices rose 5% to almost €39/MWh after clashes at Sudzha, a key transit point for Russian gas to Ukraine.
“Although limited impact on transit flows has been observed so far, market attention has increasingly focused on a potential disruption to gas supplies,” the analysts said.
This renewed focus on geopolitical risks echoes similar concerns raised in the Middle East earlier this summer. Combined with the start of the Northern Hemisphere heating season, these factors have created a new price floor in the mid to low $30s.
Despite the short-term price increase, UBS believes that fundamental market conditions remain relatively comfortable.
European gas storage levels are significantly above the five-year average, thanks to high exit stocks from the previous winter and subdued gas demand. This ample supply has served as a brake on potential price increases.
Moreover, European demand for gas has continued to decline, with electricity generation and industrial consumption both well below previous years’ levels. Although Russia’s pipeline gas supply has increased, uncertainties remain over the future of transit contracts, especially given the possible expiration of the current agreement at the end of the year.
European LNG imports have also remained subdued, with Asian buyers absorbing excess supply.
UBS expects gas prices to remain supported by geopolitical tensions in the short term, but expects a return to the low €40 level in the fourth quarter as seasonal demand increases.
However, overall market fundamentals point to downward pressure on prices, with ample storage levels and weak demand acting as offsetting factors.
