Europe Gas Rises 60% With Traders Backing Away From Russia Deals

(Bloomberg) -- European natural gas surged to a record as fears about supply during wartime were compounded by traders' decisions to avoid dealing with a key Russian player in the market.

Benchmark futures rose as much as 60%, before easing. Gas and power traders are backing away from new deals with Gazprom Marketing & Trading Ltd., according to people familiar with the matter. There's a further risk that previously agreed contracts start unwinding or clearing houses decide to stop doing business with the Russian company, liquidating their positions. Gazprom M&T declined to comment on whether some firms are cutting trading with them.

The war in Ukraine has sent commodity prices soaring -- with Brent crude nearing $114 a barrel -- as buyers, traders and shippers remain wary of dealing with Russian supplies. With the fighting entering a more brutal phase, damage to infrastructure in Ukraine could disrupt gas flows, while there also are concerns sanctions eventually could extend to energy.

But for now, Russian flows continue, and they even have increased since the invasion last week. Shipments arriving at the key European entry point of Velke Kapusany in Slovakia have rebounded to normal levels, and gas flowed to Germany via the Yamal-Europe pipeline overnight, with more capacity booked for later Wednesday.

“The market is likely repositioning itself, and participants are unwinding from Gazprom and affiliates in short- and mid-term contracts where possible,” said Tom Marzec-Manser, head of gas analytics at ICIS in London.

He said earlier that Wednesday's price spike is similar to when gas rose to a then- record on Dec. 21, which was assumed to be the result of “participants covering positions.”

Dutch front-month gas futures rose to above 194 euros a megawatt-hour, a record, and were 35% higher at 164 euros at 4:56 p.m. in Amsterdam. The U.K. equivalent contract climbed 35%.

Halting dealings with Gazprom M&T, which also is involved in trading power and liquefied natural gas, could ripple through the energy market. The company's retail unit supplied gas to more than 177,000 industrial and commercial sites in the U.K. in 2020, according to the trader's annual report. It also had agreements to ship gas to France and the Netherlands.

Also read: Tanker With Russian LNG Diverts From U.K. Amid Port Ban  

Europe relies on Russia for about a third of its gas, and any disruption could keep prices high for longer, making it difficult to refill storage facilities over the summer and prolonging the energy crunch. Governments in the region are looking to boost LNG imports, which puts them in competition with Asian buyers also starting to replenish their stocks from March onward.

Carbon futures regained earlier losses after dropping as much as 20% to 55 euros a ton on the ICE Endex. 

“European emission allowances are experiencing extreme volatility as a direct result of uncertainty related to war between Russia and Ukraine, regulatory risks and potential extended coal phaseout,” said Jan Kresnik, carbon trader at Belektron. “Aggressive selling is suspected to be caused by some large investors, which led to a cascade effect.”

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