Energy Prices Surge Amid Ukraine Crisis
Energy prices surged after Russian President Vladimir Putin signed an order to send what he called “peacekeeping forces” to the two breakaway areas of Ukraine that he officially recognized on Monday.
European natural gas led gains. It saw a rise of as high as 13%, thanks to Germany stopping the Nord Stream 2 approval process. Brent oil reached $100/barrel, while power and coal prices rose. Moscow’s move is a dramatic escalation in the standoff, with the U.K. responding by sanctioning five Russian banks and the European Union planning to restrict access to its financial markets. As soon as Tuesday, the U.S. will announce additional restrictions.
Continue reading: Fear of War Grits Europe, as Russia Commands Troops into Ukraine
Although there were not details about how many soldiers might be sent in or when they would arrive, a potential conflict with Russia could pose a threat to Russian energy resources. This country, which supplies about three quarters of Europe’s gas through the pipelines that cross Ukraine, is also a significant exporter of crude oil, as well as refined products.
Sanctions could also disrupt energy flows, with any curbs to Russia’s ability to trade in foreign currency having the potential to upend commodity markets from oil and gas to metals and agriculture.
“This means yet higher gas prices for longer as the market has already been very nervous for months,” said Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies. “Some U.S., EU sanctions are likely to follow.”
Dutch gas futures, which are a European benchmark for prices, rose 8.4% to 78.63 euro per megawatt hour at 2:26 in Amsterdam. Brent crude oil jumped up to $99.50 per barrel before falling to $97.58. German power rose 6.6%, while European coal rose 7.9%.
The standoff between Moscow and West has put energy markets on edge for several weeks. Europe has been grappling with a gas supply crisis that’s sent prices quadrupling in the past year. The tensions have added to oil’s blistering rally that’s also been driven by output not being able to keep up with steadily rising demand.
“The current move higher is a natural knee-jerk reaction on very high levels of uncertainty,” said Paul Horsnell, head of commodities strategy at Standard Chartered. “Base case is perhaps still a sharp spike higher and then a significant correction lower if energy sanctions prove limited” or countries release strategic oil stockpiles to curb prices.
Russia has kept the gas flows from Europe cut since the summer. This includes limiting sales on the spot market, and failing to replenish its European Union storage locations before the winter. Europe is now able to avoid the worst crisis prediction, including roll blackouts. However, Russia still supplies a third the country’s gas needs.
Russia’s Energy Minister Nikolay Shulginov said Tuesday that the country aims to keep gas flows uninterrupted, including LNG shipments.
The German Chancellor Olaf Scholz stated that he had directed the Economy Ministry not to submit a report regarding security of supply in order to allow the Nord Stream 2 project to proceed. Gas prices rose as well. As the German energy regulator requested, the certificate process for the pipe, which connects Russia to Germany without Ukraine, was put on hold.
German Foreign Minister Annalena Bock stated Friday that Nord Stream 2 will be included in a package of sanctions if Russia invades Ukraine.
Texts submitted to parliament to ratify the agreements Putin made with the self-declared republics allows Russia to deploy troops in separatist areas and also build bases. Interfax reports that Russia intends to recognise separatists’ claims in the whole of Donetsk and Luhansk Oblasts. Russia says it doesn’t intend to invade Ukraine.
According to the European Union, a package of initial sanctions was proposed. This would include banks financing Russian operations within the territories and those responsible for the decision. It will also “target the ability of the Russian state and government to access the EU’s capital and financial markets and services.”
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U.S. officials and allies keep warning that Russia could invade neighboring countries. The key to commodity markets will depend on what kind of sanctions they choose to impose. Boris Johnson (British Prime Minister) stated over the weekend that the U.K., and the U.S. could prevent Russian companies from trading dollars or pounds in the event of an attack by Moscow.
Europe, however, is better positioned to deal with disruptions in gas supplies now than last year. The combination of mild weather and the presence of a large supply of U.S. LNG gas has slowed the withdrawal of storages. Stockpiles that fell to record levels should now be within the 5-year range by the end of this month.
“We believe there is a sufficient inventory buffer for TTF prices to continue to slide lower over the European summer,” JPMorgan Chase & Co. said in a report, referring to prices on the Dutch Title Transfer Facility, Europe’s biggest hub.
— With assistance from Dina Khrennikova, Olga Tanas and Arne Delfs.