The gas pipes from Russia may be turned off but, according to Goldman Sachs, there’s still no need to worry. In fact, Goldman says Europe stands better prepared to face disruptions this year than any other. From their latest note:
Although the current disruptions are large, we believe that the net impact on fundamentals will likely be modest, suggesting that the current price strength will likely prove temporary. Two factors are driving this view. First, we believe that economic incentives and political pressure will likely lead to a quick resolution of the conflict. Second, we believe that Europe is better prepared to face such a disruption today than in the past owing to comfortable levels of inventories, low industrial demand due to the economic slowdown and increased access to LNG imports. Accordingly, we maintain our natural gas price forecasts.
They also provide a useful tabulation of the cuts as they stand now, and the proportion of domestic supply potentially affected.
And if the cuts persist, Goldman is still relatively confident that disruptions would still be counter-balanced by incremental LNG imports into Europe. As they explain, the arbs are open:
This is particularly the case as UK NBP prices are already sufficiently competitive to attract spot LNG cargoes, at roughly $9/mmBtu. On net, we believe that these factors will ultimately limit the impact of this situation on the European natural gas market and therefore maintain our UK NBP price forecast at $8.85/mmBtu for the 2008/2009 winter (adjusted for November and December 2008 realized prices) and $5.80 for the 2009 summer.
In that event, Western Europe should be fine. However, the situation isn’t necessarily so rosy for countries like Bulgaria, Romania, Macedonia and other Eastern European states without access to alternative pipelines or LNG imports.
In fact, as Reuters reports, thousands of Bulgarians, Bosnians and Serbs are already shivering after having many of their utilities shut off.
Meanwhile, in Western Europe, Goldman says it’s likely power stations will begin to switch to alternative fuels like coal and fuel oil, while industrial users may shut down or partially switch to gasoil. Accordingly, this has contributed to a rally in European oil product prices.
Worth noting — in the UK that means industrial clients still on interruptible supply contracts (which are gradually being phased out) would likely be the first to have supplies shut off in the event of a national gas shortage.
Related links
The Big European energy freeze – FT Alphaville
Russian gas supplies to Europe cut off – FT.com