Benchmark futures fell as much as 28%, after four consecutive days of gains. On Thursday, prices jumped 51%, the most since at least 2005, amid uncertainty over how Russia’s invasion of Ukraine would impact shipments.
The conflict — the worst security crisis in Europe since the end of World War II — has highlighted the continent’s energy-supply crunch, which has been under way for months due to low gas inventories. Russia is Europe’s biggest gas supplier, providing more than a third of the region’s needs. About a third of those shipments transit via Ukraine.
Utilities are ordering more of the fuel under long-term contracts with Gazprom PJSC. That’s because the deals are priced in such a way that Russian imports are now cheaper than spot gas traded at European hubs. The development follows months of limited Russian exports.
“Gazprom’s month-forward contracts have been ‘out-of-the-money’ all year, keeping exports low,” analysts at BCS Global Markets said in a note. “That changed yesterday as prices jumped, and demand for Russian gas has risen sharply, and could well rise further in the coming days.”
Gazprom has reiterated that gas transit via Ukraine is running as normal, and is increasing in line with client requests. Russian flows via Ukraine have rebounded to approach levels agreed in transit contracts. A key pipeline into Germany via Poland is not shipping any gas to Europe, but capacity bookings for later today signal flows halted since Dec. 21 may resume.
Besides the economics behind higher European purchases of Russian gas, “there may also be a strategic component as buyers seek to buy now given a potential for disruption in flows or further price increases,” said Stefan Ulrich, an analyst at BloombergNEF.
Ukraine’s foreign minister said earlier that Kyiv was hit with “horrific” rocket strikes as Russian troops pushed closer to the capital. Still, Ukraine’s president said his nation continued to resist, while Chinese President Xi Jinping spoke with Putin by phone and encouraged Russia and Ukraine to negotiate to “address problems,” China state TV said Friday.
The U.S. and U.K. unveiled a fresh round of penalties aimed at crippling Russia’s economy.
The European Union also backed a broad sanctions package to limit Russia’s access to the region’s financial sector and restricting key technologies.
However, the Biden administration defended its decision not to sanction Russia’s energy sector, with an official saying it was reluctant to disrupt an area “where Russia has systemic importance in the global economy.”
“We’re not going to do anything which causes an unintended disruption to the flow of energy as a global economic recovery is still underway,” Deputy National Security Advisor Daleep Singh told reporters at the White House.
Russian gas exports through Ukraine jumped almost 38% on Thursday and are expected to increase by about 24% on Friday, according to data from Ukraine’s grid operator.
“We believe that the risk of curtailment of Russian gas deliveries below its contractual commitment is limited unless there is a further material escalation of the crisis,” JPMorgan Chase & Co. analysts Vincent Ayral and Javier Garrido said in a report.
Dutch gas futures for March, the European benchmark, traded 26% lower at 99 euros a megawatt-hour by 2:11 p.m. in Amsterdam. German month-ahead power traded 26% lower at 220 euros a megawatt-hour. Coal prices dropped, while carbon emission allowances inched up.
The conflict is showing the first signs of stifling trade in vital raw materials as the money that lubricates the flow of everything from crude oil to wheat is beginning to dry up.
Some European banks have begun to impose restrictions on commodity-trade finance linked to Russia and Ukraine, heaping pressure on traders who were already looking for additional credit and bracing for harsh western sanctions on Moscow.
“Europe is already facing a big headwind from its energy bill,” analysts from Citigroup Inc. said in an emailed note. “It is clear that the move in prices is going to quickly move to ration demand away from the marginal consumer; we suspect that we are not far off finding out who those marginal consumers are.”