EU Gas Traders Ignore Ukraine Offer Rebuff as Talks Continue

Jun 12, 2014 8:26 am ET

(Updates with analyst comment in last paragraph.)

June 12 (Bloomberg) -- Europe’s natural gas traders are betting the risk of supply cuts hasn’t increased after Ukraine rejected a Russian price proposal as the European Union says an agreement can be reached in the next few days.

The premium of winter gas to the day-ahead contract in the U.K., Europe’s biggest market, declined 8.2 percent yesterday, according to broker data compiled by Bloomberg. That signals traders aren’t more concerned about supply in the colder six months from October. Ukraine rejected Russia’s offer to sell gas for about 20 percent below the current price, saying the discount could still be canceled in future.

The EU, which relies on Russian gas shipped through Ukraine for 15 percent of its needs, is trying to broker a deal to solve the price dispute and avoid disruptions as in 2006 and 2009. Russia extended a deadline for Ukraine to make payments for previous gas deliveries to June 16, state-controlled exporter OAO Gazprom said yesterday. The International Monetary Fund gave Ukraine a $17 billion aid package last month, which it says can be used to pay for gas debt.

“I do not think that risks of a gas cut-off changed too much,” Vadim Khramov, an analyst at Bank of America Corp., said yesterday by e-mail. “Russia already postponed the cut-off for the third time. We always expected them to agree on the price, as Ukraine has money from the IMF and Russia wants debt to be paid. It is a matter of what the price would be.”

U.K. gas for delivery in the six months from October was yesterday 19.5 pence a therm ($3.28 per million British thermal units) more expensive than day-ahead fuel, broker data showed. That compares with the previous day’s close of 21.25 pence a therm. The winter contract rose 0.2 percent yesterday and gained 1.4 percent today, paring a 15 percent drop this year.

Deadline Looms

The EU is optimistic an agreement can be reached to end the gas price dispute in the next few days, Energy Commissioner Guenther Oettinger said yesterday after a meeting between the bloc, Russia and Ukraine, which ended without a deal being sealed. The deadline of June 16 is “quite a way off” and there’s still a “good opportunity” for a deal, he said.

Prices for day-ahead delivery in the U.K. rallied 4.9 percent yesterday, the most since April, as storage was filled before the peak winter season and as flows halted from the Netherlands, the EU’s biggest producer. That helped narrow the price gap to winter fuel. Dutch day-ahead gas climbed 1.2 percent yesterday, beating gains in the winter contract.

Russia proposed a “compromise” package, supplying Ukraine with fuel for $385 per 1,000 cubic meters, $100 below the current price and similar to a discount that ran from 2010 until April, according to Energy Minister Alexander Novak. Ukraine wants a return to the first-quarter level of $268.50.

‘Good Deal’

“The fact that Russia proposed a discount of $100, potentially pushing the price to $385 from $485, is already a positive for Ukraine,” Khramov said. “Any price below $400 would be a good deal for Ukraine.”

The U.K.’s winter gas premium more than doubled since the end of February, when Russia seized Crimea. The gap was 22.2 pence a therm on June 9, the highest for the time of the year since 2009, broker data showed. The risk of supply interruption persists as long as no definite agreement is signed, Thierry Bros, an analyst at Societe Generale SA in Paris, said May 27.

Russia’s discount may be kept from April through the next 12 months if Ukraine is ready to settle its debts, Novak said. Ukraine should first pay $1.45 billion for the last two months of 2013 and an additional $500 million as part of the debt for gas received in April and May. If there is no payment by the morning of June 16, Ukraine will only get fuel it pays for upfront, at the current price, he said.

Escalation Unlikely

U.K. front-month gas lost 40 percent on the ICE Futures Europe exchange this year as Europe’s mildest winter in seven years cut the need to use fuel from storage.

“Apparently, the market did not believe that the risk of problems regarding gas deliveries to Europe was as big as previously feared,” Hans van Cleef, an analyst at ABN Amro Bank NV, said in a report e-mailed yesterday. “It is unlikely that the conflict will escalate after all.”

--With assistance from Ewa Krukowska in Luxembourg.