The risk of disruptions to Russian natural gas flows through Ukraine this winter is protecting European prices from the rout that sent oil to a four-year low.
U.K. gas for next quarter fell 13 percent since mid-June, less than half the 28 percent plunge in Brent crude over that time. While Brent is typically the benchmark used to set the price on almost half the gas supply in Europe, the Russia- Ukraine conflict, along with supply-and-demand fundamentals in the market, is having a bigger impact on gas prices than the decline in oil.
First-quarter supply interruptions are still possible as Ukraine may struggle to pay Russia $3.1 billion by year-end under an agreement brokered by the European Union last week for gas already consumed, according to Societe Generale SA. The 28- nation EU, which gets 15 percent of its fuel from Russia through Ukraine, sought to avoid repeats of 2006 and 2009, when disputes between the former Soviet republics over gas debts and prices led to shortages across the region amid freezing weather.
“Right now, gas prices in Europe are really linked to the Russian-Ukrainian crisis, so I don’t think the impact from oil is as big as it could be,” Edouard Neviaski, chief executive officer of GDF Suez Trading, a unit of France’s biggest utility, said in an interview in London. “Gas prices have gone down a little bit, but nothing of the same magnitude.”
First-quarter gas in the U.K., Europe’s biggest market, dropped 1.1 percent yesterday to 55.33 pence a therm ($8.85 a million British thermal units) on the ICE Futures Europe Exchange in London. Brent traded near the lowest level in four years and was at $82.50 a barrel at 12:24 p.m. Singapore time.
The European gas benchmark is at its lowest for the time of year since 2010 after the region’s mildest year in half a century left storage sites at record levels.
Russia halted gas supplies to Ukraine on June 16, with OAO Gazprom saying Ukraine’s debt stands at $5.3 billion. The cut came after Russia annexed Ukraine’s Crimea peninsula in March and as a conflict between Kiev and pro-Russian rebels in the eastern part of the country killed more than 4,000 people. Brent crude started to slump in June as growth in U.S. production added to slowing demand in Europe and China.
The oil slump, caused by a global oversupply as the U.S. produces the most crude since at least 1983, has the most “downside potential” on summer gas, Neviaski said. The contract for the six months from April has lost 7.4 percent since June 19, when Brent reached its highest this year.
Russia will resume gas flows to Ukraine after it receives $1.45 billion, the first tranche of debt repayment, and cash for November supplies under the accord signed Oct. 30 in Brussels. Supplies would halt if state gas company NAK Naftogaz Ukrainy doesn’t pay by Jan. 1, Russian Energy Minister Alexander Novak said Oct. 31.
Ukraine has funds to pay for 4 billion cubic meters (141 billion cubic feet) of gas in November and December, said Energy Minister Yuri Prodan. The price will be about $378 a thousand cubic meters, according to the accord.
While the additional volume would help Ukraine, the nation would still face shortages in the event of a cold winter, according to Chris Main, a London-based analyst at Citigroup Inc. Ukraine average demand in the winter of 2012-13 was about 6 billion cubic meters a month, he said.
The EU didn’t give any guarantees to Russia on Ukrainian payments, Marlene Holzner, an energy spokeswoman for the European Commission, told reporters in Brussels Oct. 31. The eastern European nation can use funds under an existing EU and International Monetary Fund assistance package, possibly drawing 760 million euros ($952 million) from it ahead of schedule, she said.
The security of gas transit to Europe in 2015 is “still open to question,” Thierry Bros, a Paris-based analyst at Societe Generale, said in an Oct. 31 report. The bank cut its first-quarter U.K. gas price forecast 12 percent to 61 pence a therm after the deal. The price fell 6.8 percent last month.
European gas demand is set to fall 9 percent this year, its fourth annual drop, according to Brussels-based lobby group Eurogas. Temperatures will be warmer than average this month in the mildest year since 1964 before plunging below normal this winter, according to forecaster MDA Weather Services.
“In Europe, it is much more about incremental demand, which has been incredibly mild to date, and what happens with Russia,” Christopher Bake, head of origination at Vitol Group, said in an interview Oct. 29. “The geopolitical impact on European gas could be more sustainable short term.”
Naftogaz says the price it pays Gazprom under its long-term oil-indexed contract is higher than on spot markets in Europe. With crude falling, long-term supplies may become cheaper than on spot hubs, Bros said in an Oct. 16 report.
Ukraine’s gas price from April onward as well as the size of its outstanding debt to Gazprom will be settled in a Stockholm arbitration court. Gas buyers from EON AG to GDF Suez SA have won price revisions from sellers including Gazprom through talks or arbitration after they posted losses selling gas into domestic markets. Oil’s drop probably won’t change the trend toward more spot indexation in contracts, Neviaski said.
“People want competitive long-term gas supplies and to be competitive in the long run, it means you need to be indexed on markets, so I don’t think the lower oil prices will change the trend we have been seeing for the past three to four years,” he said. “It can even help to accelerate the convergence.”
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