U.K. Gas Extends Biggest Rally Since 2011 Amid Ukraine Tensions

Apr 14, 2014 12:02 pm ET

April 14 (Bloomberg) -- U.K. natural gas extended its biggest rally since 2011 as Ukraine tensions escalated, deepening a crisis that may affect flows from Russia to Europe.

Front-month gas in the U.K., a European benchmark, gained as much as 3.2 percent to its highest level since March 27. Russia called for an emergency meeting of the United Nations Security Council after Ukrainian security forces clashed with pro-Russian gunmen in eastern Ukraine. Russia and the U.S. blamed each other for orchestrating the unrest.

Futures advanced after climbing the most since September 2011 last week, when Russian President Vladimir Putin threatened to halt gas shipments to Ukraine over unpaid debt. Price disputes between Russia and Ukraine, which carries about 15 percent of western Europe’s needs for the fuel, disrupted flows to Europe in 2006 and 2009 amid freezing weather.

“There is a real risk of a potential disruption in Russian gas shipments to Ukraine, following the Putin letter threatening a cut off if Ukraine’s arrears are not paid promptly,” Andrew Neff, an analyst at IHS Inc. in Moscow, said by e-mail today. “In theory, a halt or reduction of Russian gas to Ukraine itself should not affect Russian gas transit via Ukraine, but in practice we’ve been down this road before and the disputes in 2006 and 2009 have made Europe wary.”

Front-month gas rose as high as 53.75 pence a therm ($9 a million British thermal units) today on the ICE Futures Europe exchange in London. The contract traded at 53.3 pence as of 4:59 p.m. in London. The volume of all futures traded was 11 percent above the 100-day average for the time of the day. Dutch gas on the Title Transfer Facility hub climbed as much as 3.5 percent to 22.10 euros ($31) a megawatt-hour, the highest since March 27, according to broker data compiled by Bloomberg.

Situation Worsens

The U.S. and the European Union urged Russia to de-escalate the crisis and vowed to impose tougher sanctions, beyond travel and asset bans imposed after Russia annexed Crimea last month. Camouflaged gunmen fired on Ukrainian government troops in an anti-terror operation at the weekend, killing one serviceman and wounding five, the government said.

Western nations probably won’t impose energy-export sanctions on Russia as Europe has little alternative to Russian gas, Goldman Sachs Group Inc. and Citigroup Inc. said in separate reports.

Europe could displace Russian gas imports for eight weeks before prices need to rise to attract supplies of liquefied fuel, Goldman said in a report dated yesterday. Spare capacity on the Nordstream pipeline from Russia to Germany under the Baltic Sea wouldn’t cover lost volumes if Ukraine transit was disrupted, Citigroup said in a separate report dated today.

Ukraine, which ships about half of Russia’s gas exports to Europe, is struggling to pay a debt of more than $2.2 billion to OAO Gazprom, the Russian exporter, for past supplies.

Reliable Supplier

Russia will have to halt gas shipments to Ukraine if payment violations continue, President Putin said in a letter to 18 heads of European states on April 10. Russian natural gas exports to Europe through Ukrainian pipelines are proceeding as normal, a Gazprom press officer said today by phone, asking not to be identified in line with company policy.

Russia has been a reliable supplier of gas to Europe in even more challenging times than now, and the West should be concerned only about Ukraine’s position, Interfax reported, citing Russian Deputy Foreign Minister Vasily Nebenzya. Gas exports to Europe are “an important source” of revenue for Russia, making reductions unlikely, according to Goldman Sachs.

Northwest Europe will remain well supplied this year after a mild winter, Goldman Sachs said. Gas inventories in European storage sites were about 47 percent full on April 11, compared with 21 percent a year earlier, according to Gas Infrastructure Europe, a Brussels-based lobby group.

Low Demand

“The price risk remains skewed to the upside as few would like to sell into a situation that at the moment could easily escalate further,” Ole Hansen, head of commodity strategy at Saxo Bank, said today by e-mail. “We are heading towards a period of low seasonal demand and the fact that inventories are high after a mild winter has left the price less inclined to react aggressively to the worrying news from East Ukraine.”

Flows into the U.K. network were at 235 million cubic meters (8.3 billion cubic feet) a day, compared with a 10-day average of 212 million cubic meters, National Grid Plc data show. Supply from Norway was at 75 million cubic meters after reaching 102 million cubic meters, the highest since April 1, Gassco AS data show. Four liquefied natural gas tankers arrived in the U.K. since the start of the month and one more expected on April 15, ship-tracking and port data on Bloomberg show.

LNG Tanker

The LNG tanker Fraiha may also be heading to the South Hook terminal in Wales from Qatar. The vessel changed its destination yesterday to South Hook with an estimated arrival of April 30 before today amending it to Fujairah, a port in the United Arab Emirates.

“The risk of Gazprom cutting off the Ukraine for non- payment would have limited impact, as Europe is well placed to do without Russian gas for a couple of weeks,” Energy Aspects Ltd. said in a report e-mailed today. “Such a disruption would be resolved by facilitating the payment by the Ukraine of its outstanding gas bills to Russia.”

Day-ahead gas on the National Balancing Point advanced 2.2 percent to 53.1 pence a therm, according to broker data compiled by Bloomberg. The same-day contract fell 0.6 percent to 52.35 pence as the nation’s pipelines were forecast to contain 351 million cubic meters by 6 a.m. tomorrow, compared with 347 million at the start of today.