Central Eastern Europe – Aug 2018

Regional gas demand in Central Eastern Europe (CEE) rose by 0.33 bcm y/y to 1.93 bcm in August, buoyed by CDDs that were 34% higher y/y and the second-highest in 10 years. Exceptionally high temperatures for the time of year this month should curb any late-September heating demand, especially compared to last September’s high HDD base. If there is tightness in the market, it will be on the supply side. Aggregate Russian supply transited through Ukraine is still lagging well below early summer highs, slowing the region’s stockbuild. If Russian supply remains slow, Central Europe will make little progress on closing the y/y storage gap (which has widened to over 1 bcm) unless it pulls supply away from Northwest Europe and/or Italy.

Baumgarten was the first region in Europe to post a y/y storage surplus early in the summer, with stocks up by 0.7 bcm y/y at the start of May. That y/y surplus peaked at 1 bcm in late June, but steadily narrowed in July before turning to a deficit by early August. The narrowing in July was expected due to scheduled Nord Stream maintenance which cut Russian supply y/y, but the continued widening of the deficit in August—and the associated rise in gas prompt prices to fuel switch levels that would help push gas out of the power sector—suggests that the continued weakness of Russian receipts was less than expected. Aggregate Russian supply into Europe fell by 0.35 bcm (3%) y/y to 13.7 bcm (0.44 bcm/d) last month, and well under the Q2 18 monthly average of 14.35 bcm (0.47 bcm/d).

Ultimately, total September Russian flows are likely to be higher y/y owing to the Nord Stream maintenance that cut NW European take on 12-21 September 2017, but the rise could be lower than previously expected due to this month’s slow pace of about 0.45 bcm/d. If the current weakness compared to early summer flow rates of 0.5 bcm/d remains, Europe is unlikely to close the y/y storage gap before October. Indeed, if the current flow dynamics remain in place—with slow Velke Kapusany receipts tightening supply into Central Europe, but supply into NW Europe robust—the y/y storage deficit in NW Europe should narrow, while the y/y Baumgarten shortfall will widen. This will lead Central Europe to lean more heavily on NW Europe for winter stockdraws, a reversal from the balance that Europe began with in winter 2017-18. If Baumgarten storage starts the winter in y/y deficit—and given that Ukrainian storage is 1.4 bcm lower y/y at 15.1 bcm—then we would expect Baumgarten prices to remain at a premium to surrounding hubs if winter weather patterns in the western and eastern gas markets are similar. Current seasonal weather forecasts suggest that CEE will be consistently warmer than NW European gas markets, and that could drive periods where those spreads tighten.