"Losses will be approximately equal." The prospects for a gas war between Russia and Europe

Marcel Salikhov, President of the Institute for Energy and Finance, gave an interview to RTVI on the energy sanctions consequences.

Dmitry Medvedev threatened that Europeans would soon have to pay $2,000 per 1,000 cubic meters of gas. Gas futures prices in Europe have already broken through this mark. How serious is this blow for Europeans and what will happen to gas prices next?

It should be understood that the prices for TTF futures are not the prices at which Russia sells gas to Europe. The cost of Gazprom's physical deliveries is regulated by long-term contracts. The prices embedded in these contracts are pegged to the spot price: somewhere this peg is stronger, somewhere it is weaker. A good example: in 2021, the price of TTF averaged $650 per cubic meter, while the average price of Gazprom supplies was in the range of $300 per cubic meter. That is, we can assume that the actual price of Russian supplies to Europe is two times lower than the price of futures. If the price of TTF futures is $2,000 per cubic meter, then the real cost of supplies is about $1,000.

Now the price of futures is influenced by two main factors. The first is geopolitics. What will happen next with the fighting in Ukraine is unclear, so prices are going up due to fears of possible supply disruptions. The second is seasonality. During the heating period, the need for energy resources is growing, gas is consumed from European underground gas storages (UGS). The timing of the heating season varies from year to year, but in general it can be considered that it ends in late March or early April. The situation with geopolitics is difficult to predict, but after the end of the heating season, demand will decrease. That is, the conditional $2,000 per cubic meter is more of an extreme price hike than a new reality. There is no reason to believe that prices will remain at this level throughout the year.