European Natural Gas Prices Jump as Sanctions Spur Energy Shortage Concerns

(Bloomberg) -- European natural gas rose after a raft of sanctions against Russia over its invasion of Ukraine amplified concerns about energy shortages.

Benchmark futures pared earlier gains after the stronger restrictions earlier drove prices as much as 36% higher. The new sanctions exclude energy, but they could force buyers, financiers and shippers to stay away from Russian flows. Stricter restrictions also may follow. In addition, there are fears Moscow could retaliate by cutting supplies.

Europe relies on Russia for about a third of its gas, with many of those shipments flowing through pipelines crossing Ukraine. Any disruption could leave Europe freezing in the winter and curb the continent's electricity production, forcing energy-intensive industries such as metals smelters and fertilizer makers to slow or shut their output.

“The additional sanctions may prompt retaliation from Russia, which could cut energy imports to Western Europe,” Neil Shearing, chief economist at Capital Economics, said in a report.

Buyers too are wary. Liquefied natural gas importers from Asia to South America have decided to temporarily halt buying spot shipments from Russia as they wait for more clarity on restrictions against banks and companies, according to traders. Some banks are also pulling back financing for the trading of Russian commodities, including oil and metals, a move that could roil markets.

Still, pipeline gas supplies to Europe remain stable, after flows through Ukraine jumped last week driven by higher orders from buyers following the invasion. Russia's state-run exporter Gazprom PJSC reiterated on Monday that it's meeting requests from European buyers in full.

Under the sanctions, some Russian lenders will be excluded from the SWIFT bank messaging system used for trillions of dollars worth of transactions around the world. The penalties also will target the central bank's foreign reserves. If the central bank's assets are frozen, it no longer will make sense for the country to export more than it imports, Jeff Currie, head of commodities research at Goldman Sachs Group Inc., said on Bloomberg TV.

Chaos in Commodities as Russia's War on Ukraine Upends Trade

The U.S. is also not ruling out energy-specific restrictions. “Energy sanctions are certainly on the table,” White House Press Secretary Jen Psaki said on ABC's “This Week” on Sunday. “We have not taken those off, but we also want to do that and make sure we're minimizing the impact on the global marketplace and do it in a united way.”

Dutch front-month gas futures closed 4.4% higher at 98.60 euros. The U.K. equivalent contract added 4.2%. Concerns that industrial activity will slow down sent carbon prices tumbling.

German electricity for next year, a European benchmark, closed 3.6% higher. Day-ahead prices there and in France jumped in broker trading as wind generation is set to decline Tuesday. Wind power is forecast to remain low for the rest of the week, leaving Europe more reliant on expensive gas and coal to meet demand.

No Short-Term Fixes as Energy Prices Surge on Russian Sanctions

Weaning Off Russia

Governments in Europe are looking to wean their economies off Russian gas. Germany, the region's biggest market, plans to rapidly accelerate the expansion of wind and solar power, bringing forward a target to generate almost all electricity from renewable sources by 15 years to 2035. The country, which earlier this month also stopped approvals for the controversial Nord Stream 2 gas pipeline from Russia, also plans to speed up building LNG terminals.

Shell Plc, which helped finance the gas link, also said Monday that it would end its involvement with the project. It's part of a broader move to exit the company's joint ventures in Russia, including a massive Sakhalin-2 LNG facility.

“So far, Western nations have excluded Russian commodity exports from sanctions,” said Mark Haefele, chief investment officer for global wealth management at UBS Group AG. “But positions are shifting fast, and Western nations have already begun implementing measures that seemed unlikely a few days ago, and the White House has stated that energy sanctions are on the table.”

The risk of disruptions was set to be discussed by European Union energy ministers at an emergency meeting in Brussels on Monday. Separately, Russia and Ukraine have agreed to continue talks aimed at ending the war after consulting with their presidents, the Interfax news service reported, citing top officials from the two delegations that met in Gomel, Belarus on Monday.

Russia Retaliates as Sanctions Over Ukraine Grow: Ukraine Update

Market News, Analysis