UK and European gas prices rise higher over Russia-Ukraine concerns

European and UK gas prices hit another record high on Tuesday over concerns that a potential Russian invasion of Ukraine could disrupt already stretched energy supplies over the winter.

Benchmark prices for natural gas for delivery in January jumped to as much as €120.25 per megawatt-hour, up from a record high closing price of €116/MWh on Monday. The UK equivalent rose to as much as £3.04 a therm, extending its gains over a previous high of £2.94 on October 5.

European prices have now surged almost 30 per cent since the start of the month, surpassing the record highs set in October when the rebounding global economy drove up demand and European calls for additional gas deliveries from Russia went unanswered.

Russian president Vladimir Putin’s initial promises to boost supply eased prices last month, but European storage facilities are yet to be replenished and spells of cold weather have led to further drawdowns.

“Cold temperatures and soft wind conditions raised the call on fossil-fuelled power plants more recently and thus temporarily boosted natural gas demand”, said Norbert Rücker, a strategist at Julius Baer. “More importantly, the escalation of tensions between Russia and Ukraine seems to nourish supply fears and add a risk premium on prices.”

An estimated 100,000 Russian troops have been positioned on Ukraine’s border despite calls from world leaders for Moscow to de-escalate and pursue a diplomatic solution. US officials have warned that Russia could be planning to invade Ukraine as soon as early next year, in a move that would further delay the controversial Nord Stream 2 gas pipeline but also risk disrupting other supplies.

Continental Europe gets more than a third of its total gas supplies from Russian state-backed Gazprom, at present via two pipelines: one through Belarus and Poland and the other through Ukraine.

Still, it is possible that rising cases of the Omicron coronavirus variant could force governments to impose more restrictions, hitting economic growth and reducing energy demand.

The International Energy Agency said on Tuesday it expected a surge in new Covid-19 cases to slow the recovery in oil consumption, with air travel and jet fuel the hardest hit. It now estimates global demand will rise by 3.3m barrels per day in 2020, down 100,000 bpd from an earlier estimate.

“The surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is under way,” the IEA said in its latest monthly report, released on Tuesday.

But analysts say there is no obvious reprieve for Europe’s gas market outside of a mild winter. Across Europe, gas storage facilities are now just 62.8 per cent full, more than 10 per cent below seasonal norms. If the drawdowns continue at current rates, storage levels will reach critically low levels by March or April next year.

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