Ukraine crisis: Europe’s stored gas high as prices soar

Russian gas pipeline in Boyarka, near Kiev, 2009 Russia provides about a quarter of Europe's gas, half of it through Ukraine

Gas and oil prices have risen amid fears the Ukraine crisis could have a damaging effect on one of Europe's main energy supply routes.

But analysts say high European gas stocks will limit the turbulence.

Gas futures climbed by up to 10% in early trading, while the benchmark price for oil rose by more than 2%.

Traders are worried about the stability of supplies from Russia, which provides a quarter of Europe's natural gas, half of it through Ukraine.

However, a relatively mild winter has reduced demand for heating fuel, with storage levels at the main gas hubs about 20% greater than last year.

In Germany, Europe's biggest gas consumer and Russia's largest customer, stocks are at more than 60% of capacity, capable of satisfying 60 days of demand.

Russian reliance?

Russia is Europe's biggest supplier of natural gas, but the continent has been weaning itself off dependence on its neighbour for the last decade.

It now imports less than 30% of its natural gas from Russia, compared with 45% in 2003, according to European Union statistics.

Europe is also less reliant on the Ukraine link, with improved gas infrastructure now meaning supplies could go via alternative routes in the event of disruption.

Map showing the main gas pipelines in Ukraine

The Nord Stream pipeline, which goes through the Baltic Sea to Germany, or another route to Germany via Belarus and Poland, are two options.

Russian state gas producer, Gazprom, also plans to build another sub-sea pipeline - the South Stream - to bypass Ukraine by 2016.

"Low utilisation means Ukraine's gas network is of lesser importance today than in the past," said US market analysts, Bernstein Research, in a note to clients.

There are also doubts that Russia could afford to disrupt or cut part of its gas supply to Europe, which is worth almost $100m (£60m) a day. Analysts estimate it accounts for about 3% of Russian economic output.

Russia's economy registered disappointing growth of 1.3% last year, and its central bank has lowered its own forecasts, anticipating growth of below 2% until at least 2016.

Historic shutdown

Gazprom said on Monday that supplies to Europe via Ukraine were unaffected, but a previous Russian supply cut to Ukraine caused major disruption across the continent and pushed up prices significantly.

In January 2009 Russia turned off the taps to its neighbour in a row over contract prices and accusations that Ukraine had been siphoning off gas meant for European customers.

The two-week shutdown, during a very cold spell, resulted in severe disruptions across the continent, with more than a dozen countries without their expected supplies of Russian gas.

Analysis

Energy is at the heart of the commercial links between Russia and the European Union.

Russia is the EU's biggest outside supplier of oil, and of coal and gas, which are important fuels for electricity as well as heating.

Curtailing that trade is unappealing to both sides. Russia needs the income from its largest export market, and Europe needs the energy - though the timing makes it less vulnerable than it might be. A relatively mild winter is coming to an end, and Europe has healthy gas stocks.

But energy is a battleground where neither the EU nor Russia wants to fight.

Bulgaria, Serbia and Bosnia, who were almost completely dependent on supplies via Ukraine, were left with major shortages.

Parts of Europe had to shut down industrial plants and domestic heating systems, find alternative sources of gas or switch energy plants to oil. Slovakia and Bulgaria considered restarting mothballed nuclear reactors.

While traders say healthy European gas stocks would limit the impact of another shutdown, any disruption in the current crisis would almost certainly lead to a sharp rise in gas prices.

"Shifts in the global energy market have left Russia with less of a grip, but this nonetheless remains important," said Michala Marcussen, an economist at Societe Generale, in a research note.

Gazprom has already warned Ukraine that it may increase the gas price for Kiev after the first quarter.

"The situation with payments is worrying," said Andrei Kruglov, Gazprom's chief financial officer.

"Ukraine is paying but not as well as we would like it to. We are still thinking about whether to extend the pricing contract into the next quarter based on current prices."

Oil impact

Concerns about one of Europe's key gas supply routes have had a knock-on effect on other commodities, especially oil, as demand for alternative fuels increased.

The benchmark oil price, Brent Crude, rose to a peak of $112.10 per barrel in early trading, its highest since 30 December.

Its rise is also due to concerns about oil supplies from Russia, one of the world's largest oil producers, as well as the impact of any disruption in the gas market.

"Oil markets are reacting on the potential that the situation could worsen," said Ben Le Brun, a market analyst at OptionsXpress.

"I definitely suspect oil will move much higher, if it actually comes to war."

Meanwhile, on the gas markets, UK prices for next-month delivery climbed as much as 10%, with German and Dutch prices rising by a similar amount, according to ICE Futures Europe exchange.

The unrest in Ukraine also sent the Russian rouble to a record low against the US dollar, prompting Russia's central bank to raise its key lending rate by 1.5%.

As a result, the main index of Russian stocks, MICEX, dropped by 11%, with Gazprom shares slumping by 13%.

More on This Story

More Business stories

RSS

BBC Business Live

  1.  
    TOUGH MUDDER 06:36:
    Man leaping

    The Today programme likes a natter with a company boss of a Friday morning. Today's is Will Dean from Tough Mudder. People pay him £100 to spend time on an obstacle course - jumping, swimming, crawling through mud and so forth. Why? "It's not a race its a challenge. It's about team work over 12 miles. Its a set of individual challenges to test you mentally and physically." Fine.

     
  2.  
    PORTUGAL BANK 06:28: BBC Radio 4

    Shares in Banco Espirito Santo lost 42% yesterday after the bank announced a loss of 3.6bn euros (£2.8bn). Bill Blain from chief strategist at Mint Partners tells Today this is "Deeply concerning for all bankers looking at Europe. It's [Europe] had 450bn of new capital to sort out the relationship between sovereign debt and the banks. What the Banco results show shows is the bank remained a piggy bank for the family".

     
  3.  
    US ECONOMY 06:15: Radio 5 live

    The US releases jobs data later today - GDP figures earlier this week showed the US economy growing strongly. Expectations are that another 230,000 jobs could have been added to the US economy in July and that the unemployment rate may - we'd stress the may here though - have fallen below 6%.

     
  4.  
    US ECONOMY 06:07: Radio 5 live

    US financial expert and businesswoman Terry Savage tells Wake Up to Money the US economic recovery is still difficult to read: "It's kind of a glass half full/half empty kind of thing. Different parts of the economy have picked up, particularly consumer spending on autos and other big items," she says. "It's not what we would call a booming economy . It's just so much better than what we have had for the last few years."

     
  5.  
    06:01: Rebecca Marston Business reporter, BBC News

    In a short while we'll have results from William Hill and British Airways owner IAG trading updates. And we'll have an eye on everything else that's going on. bizlive@bbc.co.uk @bbcbusiness.

     
  6.  
    06:00: Matthew West Business Reporter

    Morning folks. So what's happened overnight? Well the World Trade Organisation has failed to agree a global customs deal.... again. But manufacturing in China grew at its fastest pace in more than two years in July, according to the latest figures.

     

Features

From BBC Capital

Programmes

  • A woman sits on a bed in a scene from Gustav Deutsch's latest film about Edward Hopper's paintingsTalking Movies Watch

    How film-maker Gustav Deutsch brought Edward Hopper’s paintings to life

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.