Gas prices rise as Gazprom threatens supply cuts to Ukraine pipeline
Gas prices spiked this morning after Gazprom warned it could further limit supplies into Europe next week, putting pressure on the troubled continent and escalating the looming possibility of blackouts this winter.
UK and Dutch benchmarks were up 8.7 per cent and 7.8 per cent respectively in this morning’s spot market trading, following the latest wave of Russian intervention in the energy markets.
Kremlin-backed gas giant Gazprom threatened to reduce gas flows through the one remaining pipeline providing supplies into Europe via Ukraine.
It accused Ukraine of guzzling 52m cubic metres of gas contracted to Moldova, over an unspecified amount of time.
This is slightly more than one day’s supply through the pipeline – with around 43m cubic metres travelling through Ukraine from Russia into Western Europe via the remaining pipeline on a daily basis.
Gazprom said any reduction in volumes would be equal to the perceived under delivery”from Moldova to Ukraine.
The Gas Transmission System Operator of Ukraine (GSTOU) denied the accusations, and argued Russia was manipulating facts to put more pressure on the country.
Olga Bielkova, Director of Government and International Affairs of GTSOU, said: “This is not the first time russia has resorted to using gas as an instrument of political pressure. It manipulates facts to justify its decision to limit further the volume of gas supplies to European countries.
“Gazprom deliberately interprets the introduction of European business rules of operation at interstate interconnection points as a violation of contractual obligations, obviously for political rather than commercial purposes.”
Europe scrambles to shore up supplies
The EU has scrambled to top up supplies to near full capacity, through a mixture of energy rationing and vast LNG imports from the US and Middle East.
However, the latest developments could initiate a further supply squeeze on Europe, as Russia’s large-scale gas cuts have typically begun with threats to reduce volumes by a small amount under a perceived grievance.
While Gazprom suggested it would continue the rest of its normal gas flows to the country – it previously committed to gas flows via the Nord Stream 1 pipeline.
A cold winter could also put more pressure on supplies, making Europe dependent on more gas than it holds in storage to meet heating and industrial demand through the winter.
Wholesale gas prices have fallen sharply from all-time high of around €310 per megawatt hour in August, due to reduced industrial demand – with prices now trading at €123.50 per kilowatt hour on the Dutch TTF Futures Benchmark.
However, these prices are still historically high, with gas trading at €15.60 per kilowatt hour in January 2021 prior to the crisis.
Nathan Piper, head of oil and gas research at Investec, told City PM threats from the Kremlin were likely to keep prices elevated into next year.
He said: “Ongoing mild weather across Europe has kept prices under control. However the threat of further reductions in Russian volumes into Europe are likely to support higher prices throughout next year as LNG is secured to replace lost Russian gas and refill storage ahead of winter.”
National Grid included the possibility of rolling blackouts in January as its worst-case scenario in its winter outlook, however its base-case positions suggest the UK should stave off a winter crisis.
City PM approached the organisation for comment on whether the latest developments would affect its forecasts.
The EU is set to meet to further discuss proposals from its executive arm to cap gas prices, with further talks expected to begin today.
Ole Hansen, head of commodity strategy at Saxo Bank, believed markets were still waiting for the EU to finalise the cap before determining their reaction to the developments.
He said: “The market is trying the gauge the impact of an EU proposed price cap of €275 per megawatt-hour on natural gas prices to defend consumers against a steep rise in energy costs. The level, however, is well above the current price, but below last summer’s highs when Dutch TTF benchmark gas prices went as high as €300 plus.