Will the Nord Stream leak cause a European crisis and natural gas spike?

Natural gas prices back in the spotlight

Claims of potential sabotage on the Nord Stream pipelines that transport natural gas from Russia to Europe has brought fresh concerns over supplies as we head towards a critical winter period. Stockpiling of gas supplies in Europe has been a key priority for the likes of Germany and Italy, with the Statista image below highlighting just how important Russian gas has been prior to this crisis. The steadily declining flow of gas from Russia over the course of the year certainly has raised concerns over a potential crisis and subsequent price spike.

European stockpiles looking healthy

At current levels, we have seen gas storage in Europe up to the peaks seen in both 2018 and 2021. Those peak storage levels typically come in mid-October, with injection levels starting to come off sharply as we approach the end of the restocking phase. This helps alleviate some of the concerns over the coming winter, with the withdrawal phase expected to gain traction in the coming month as temperatures fall.

A country specific breakdown highlights how Germany has done a stellar job of restocking in the face of dwindling supplies. The fact that they have managed to bring storage levels up above the typical levels seen at this point does provide greater confidence for the winter ahead.

The reliance on Russia has certainly dwindled over the course of the year thus far, with Europe increasingly importing liquid gas (LNG) from the US and Asia as they adjust their supply chain. It is also worth noting that higher prices and the cost-of-living crisis should ensure a more conscious approach from households to energy usage. With that in mind, the news that Russian imports will be negligible throughout winter should not necessarily result in renewed calls for a crisis over winter.

While we have seen significant upside for gas prices on expectations of a European crisis this winter, the declines seen over the past month highlight a growing confidence that the chances of that happening are lessened thanks to effort to bring stockpiles up to a comfortable level. Nonetheless, there is clearly a significant reallocation towards Asian and US imports, which should help support prices globally.

The chart below highlights how we have seen huge volatility in European prices, with US prices remaining respectable in comparison. The risk remains that the US President Joe Biden will enact a ban on exports should he see the influence of European demand and prices sparking a major uplift in domestic energy costs. However, until that happens, there is still a good chance that we see prices remain elevated in response to the new European reliance on US/Asia gas imports.

US prices in focus

The chart below highlights how we have seen a significant pullback in US natural gas prices over the course of the past month. That decline from the 14-year high seen in August has taken us back into a confluence of support between an ascending trendline, 76.4% Fibonacci, and 200-day simple moving average (SMA). This zone of support looks to provide a potential area of support just as fears reemerge around potential supply issues in Europe. Thus, for traders, it is worthwhile watching for a potential upward turn from this zone.

The four-hour chart highlights how the price remains within a clear downtrend, with another leg lower taking shape today. The key thing to note is the ongoing pattern of lower highs, with a rise through the $7.237 level required to bring a more positive outlook for this market.

Summary of outlook and risks

Overall, European stockpiles appear to be in healthy shape coming into winter. Demand could adjust naturally to higher prices anyway, but we will have to see how the winter temperatures impact requirements over the coming months. A particularly cold winter could reduce supply for businesses, although there is a good chance that some will already be lessening their usage in response to elevated prices.

The existence of US and Asian LNG supplies does alleviate some of the impact felt by dwindling Russian imports, but there is a distinct risk that the US president Joe Biden bans exports in a bid to lower domestic prices and appease voters. Gazprom have threatened to cut off the Ukrainian route for imports, which does raise risk that we see yet another source of European gas eradicated. However, many had expected we would see all Russian gas supplies removed soon enough anyway.

Nonetheless, should that final supply cut take shape, it would likely bring about another reminder that European supply options are declining as time goes on. Overall, the demand picture for US gas should help stabilise prices soon enough, with the recent decline essentially coming as traders realise a European energy crisis is less likely. Nonetheless, keep an eye out for a potential uplift at some point to highlight where buyers are happy to come in to reflect the new norm where Russian imports to Europe are no more.