U.K. Gas Jumps to 3-Month High as Ukraine Sees Russian Invasion

Aug 28, 2014 12:29 pm ET

Aug. 28 (Bloomberg) -- U.K. natural gas futures jumped to the highest in more than three months as fighting in eastern Ukraine intensified, heightening the threat of supply disruptions to Europe this winter.

Front-month gas in the U.K., Europe’s biggest market, rose as much as 6.6 percent on the ICE Futures Europe exchange in London to the highest level since May 13. Fuel for delivery in winter gained as much as 3.7 percent, the biggest jump since July 17. Ukraine President Petro Poroshenko called an emergency security meeting to defend against what he called a “de facto” Russian incursion after separatists gained ground.

Societe Generale SA raised its U.K. gas price forecast for the first quarter by 6 percent as it now assumes a “short interruption” of gas transit via Ukraine this winter, it said today by e-mail. Russia supplies about 30 percent of Europe’s gas, half of which travels through Ukraine. Disputes between the nations disrupted flows to Europe in 2006 and 2009.

“The market has been complacent in the summer, but the summer will finish soon and people will realize a solution is difficult to find,” Societe Generale analyst Thierry Bros said by phone from Paris today. “This will end badly soon.”

Front-month U.K. gas rose to 45.75 pence a therm ($7.58 a million British thermal units) on ICE before trading at 45.50 pence a therm by 4:59 p.m. in London. The contract expires today. Futures for delivery in winter, or the six months starting in October, climbed to as high as 60.95 pence a therm on ICE before easing to 60.6 pence a therm.

Heavy Weapons

Russia sent regular troops across the border, Poroshenko said at a meeting of the country’s security council, while the North Atlantic Treaty Organization’s Dutch Brigadier General Nico Tak said Russian soldiers with “heavy weaponry” are operating inside Ukraine.

The European Union will prod Russia to strike a temporary deal with Ukraine allowing gas flows to resume while a court reviews the case, EU Energy Commissioner Guenther Oettinger said in Berlin today. Oettinger plans to discuss the proposal with Russian Energy Minister Alexander Novak in Moscow tomorrow. Russia’s OAO Gazprom cut supplies to NAK Naftogaz Ukrainy on June 16 due to a debt and price dispute.

“The possibility to see Russian gas flows to Europe cut is quite low for it may be harmful for the already stressed Russian economic situation,” said Lysu Paez-Cortez, an analyst at Natixis SA in Paris. “Nevertheless, the news on heightened tensions between the two countries triggers concerns on the reliability of Russian energy supplies ahead of the winter.”

Cold Winter

Most of Europe will get colder-than-usual weather this winter, according to MDA Weather Services and Commodity Weather Group. The coldest period will be January, with France set to face temperatures about 1 degree Celsius (1.8 degrees Fahrenheit) below normal, David Streit, meteorologist at CWG, said by e-mail on Aug. 26.

Front-month gas in the Netherlands, the EU’s biggest producer, rose as much as 7.1 percent to 19.35 euros ($25.49) a megawatt-hour, broker data compiled by Bloomberg showed. The equivalent German contract jumped as much as 6.6 percent to 19.50 euros. The Netherlands relies on Russia for 5 percent of its gas, while Russia meets 37 percent of Germany’s needs. The Baltic nations and Finland are completely dependent on Russia.

“More difficulties would be seen” if Europe has a colder- than-usual winter and supply disruptions materialize, Hans van Cleef, an analyst at ABN Amro Bank NV in Amsterdam, said by e- mail today. “The effect in eastern Europe would be much bigger than in western Europe.”