Volatility in the London Gas Market: Assessing Pipeline Closure Impacts

The London gas market has experienced volatility this week as traders evaluate the potential impact of pipeline closures on the European gas supply.

Mid-week rumors indicated that Azerbaijan might be negotiating a complex deal with Ukraine to provide an alternative source of gas to replace the Russian gas previously supplied to Eastern European customers via Ukraine by Gazprom. The main Gazprom pipeline has already been disrupted following Ukraine’s capture of a pumping station at Sudzha. Additionally, Ukraine has indicated it does not intend to renew the contract for these shipments when it expires at the end of 2024, which is expected to see 14 billion cubic meters of gas transported through Ukraine to Europe over the year. Both Ukrainian and Azerbaijani officials have dismissed these reports, and trading patterns in the commodities market have supported these denials.

Despite this, Ukraine appears committed to gradually reducing the flow of Russian gas to Europe. There is also limited pipeline capacity to facilitate a diversion of gas through Azerbaijan (or Turkey) or to allow for increased Azerbaijani supply to be offset by additional Russian gas sent to Azerbaijan. As a result, over the next few years, a greater volume of gas will likely need to be shipped via LNG sea terminals to meet European demand, assuming hostilities in Ukraine continue.

Commodity traders suggest there will likely be an increased demand for LNG tankers servicing supply routes to Europe from both the US and the Middle East. However, this does not necessarily mean a global increase in LNG shipping demand. Shipping times from source to market are shorter for Europe than for Asian markets, and higher prices are expected to redirect shipping routes toward Europe.