Bloomberg News

European Gas Jumps Most Since March as Russia Cuts Ukraine Flows

June 16, 2014

U.K. Natural Gas Rises as Ukraine Faces Supply Cut

Ukraine, which supplies about 15 percent of Europe’s gas through pipelines from Russia, failed to pay a debt of $4.458 billion for deliveries in November, December, April and May by a 10 a.m. Moscow time deadline, Gazprom said today. Photographer: Vincent Mundy/Bloomberg

U.K. and Dutch natural gas prices climbed the most in more than three months as Russia’s pipeline-gas export monopoly OAO Gazprom (GAZP) cut shipments to Ukraine, threatening flows to the European Union.

U.K. front-month gas jumped as much as 8.8 percent on ICE Futures Europe, the biggest increase since March 3, the first trading day after Russian President Vladimir Putin got approval from lawmakers to send troops into Ukraine’s Crimea region. Dutch prices rose 10 percent to their highest level since May 12, according to broker data compiled by Bloomberg.

The EU tried in vain to broker an accord between the two nations that would avoid disrupting supplies to the bloc, which gets about 15 percent of its gas via Ukrainian pipelines from Russia. The reduction follows similar cuts in 2006 and 2009.

“The response of European natural gas prices is coherent in face of the risk of Europe seeing 15 percent of its natural gas supplies at risk,” Lysu Paez-Cortez, an analyst at Natixis SA in Paris, said today by e-mail. “I think the market expected the European Energy Commission to succeed in its attempt to try and make the two parts to find an exit to the differences.”

U.K. next-month gas rose as high as 45.55 pence a therm ($7.69 a million British thermal units) on ICE, the highest since May 13, and traded at 42.90 pence at 1:03 p.m. in London. Dutch prices for July, which also increased the most since March 3, climbed as high as 20 euros ($27) a megawatt-hour on the TTF hub and were recently at 18.50 euros.

Russia cut flows to Ukraine and is providing only gas destined for the EU, Andriy Kobolyev, chief executive officer of Ukrainian energy company Naftogaz Ukrainy, said today, adding that a “fair price” would be sought via arbitration.

Outstanding Debt

Ukraine failed to pay a debt of more than $4.4 billion for deliveries in November, December, April and May, and Moscow-based Gazprom is providing full volumes to European partners and has alerted the EU about possible gas transit risks and is doing all it can to ensure stable gas shipments, it said.

Day-ahead prices in the U.K. rose 13 percent in the five days through June 16 in its biggest weekly gain since June amid supply concerns, broker data showed.

“The fundamental view of the markets has been shifting over the last couple of weeks as the gas flow deadline for Ukraine loomed on the horizon,” Stuart Jones, head of European gas at Tradition Financial Services Ltd. in London, said today by e-mail. “The recent bias has definitely been to the upside, and there has been a sense of inevitability of a return to extreme volatility. I feel the market will trade in waves over the next couple of days as players digest the ramifications. It’s going to be a rocky ride for all.”

Frosty Weather

Earlier price disputes between Russia and Ukraine disrupted flows to Europe in 2006 and 2009 amid freezing weather. Supplies to at least 20 European countries were affected for almost two weeks in 2009 after talks between the two nations collapsed. Gazprom at the time accused Ukraine of siphoning off gas meant for transit to the 28-nation EU, a charge the nation denied.

Europe is better prepared now after the warmest winter in seven years left EU storage 64 percent full, the highest for this time of the year since 2011, according to Gas Infrastructure Europe, a lobby group in Brussels.

Unlike in 2009, Europe can now get some of its supplies via the Nord Stream pipeline connecting Russia and Germany through a link under the Baltic Sea. Gazprom said June 13 it was ready to increase flows via Nord Stream in case of disruption. Supplies of liquefied natural gas can also help Europe. The U.K. received 10 cargoes in May, the most in a year, according to port authorities and ship-tracking data.

Power Stations

“At the moment, LNG is freely flowing into the U.K., storage levels are up against historical average, and on the continent, power stations are favoring coal over gas,” Nick Campbell, an analyst at Inspired Energy Plc (INSE) in Kirkham, England, said today by e-mail.

Gazprom raised prices for Ukraine by 81 percent this year to $485 per 1,000 cubic meters by removing two discounts. It said last week it could provide a $100 discount, Ukraine rebuffed the offer and said it would be prepared to pay $326 per 1,000 cubic meters, a compromise proposed by the EU.

While a short disruption of gas supplies to Europe during summer would be “manageable,” a longer period would leave the region unable to refill storage, transferring shortages to winter, the International Energy Agency said June 10 in its medium-term gas market report.

“The market will slowly have to adapt to this increased risk,” Thierry Bros, an analyst at Societe Generale SA in Paris, said by e-mail.

To contact the reporters on this story: Isis Almeida in London at ialmeida3@bloomberg.net; Anna Shiryaevskaya in London at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Dan Weeks, Sharon Lindores


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