Gas prices have spiked following Russia’s decision to order troops into eastern Ukraine, raising fears of further energy supply shortages and disruption.
UK and European benchmarks have soared 12 per cent today, with Russia displaying increased hostility toward Ukraine, targeting the country with vicious cyber-attacks.
UK Defence Secretary Ben Wallace has warned Russian President Vladimir Putin has gone ‘full tonto’ on invading Ukraine, describing him as a ‘busy adversary.”
Despite claims from the Kremlin that energy supplies into world markets will remain uninterrupted, and initial commitments from the US to avoid energy markets with sanctions, the possibility of escalating measures amid increased conflict in the region has raised fears of reduce supplies and consequent cost-of-living pressures.
Commerzbank energy analyst Barbara Lambrecht said: “Market participants will probably remain cautious for the time being given the tense geopolitical situation and the fact that the European gas market is particularly exposed in this conflict.”
German Chancellor Olaf Scholz made the bold call earlier this week to suspend the approval process for Nord Stream 2, which is a huge setback for hopes of renewed supplies across the continent.
The pipeline was previously expected to double flows between Russia and Germany – providing 55bn cubic meters per year of natural gas.
Energy specialists Cornwall Insight have argued that any measures from the West which further reduce Russian supplies into the continent could have a sustained long-term effect on domestic gas prices.
Senior analyst Dr Craig Lowrey said: “While the UK is not dependent on gas from Russia, and should not experience direct supply issues, the price impacts will be evident across the entire European gas market. This means that customer bills in the UK may continue to increase as a result of the sanctions against Russia and further financial support from the government may be needed.”
Domestic households are already bracing for an eye-watering 54 per cent hike in the consumer price cap, following market carnage that has seen dozens of energy firms exit the market, with average annual energy bills soaring to £2,000 per year from April.
The prospect of further hikes in prices from sanctions follows gloomy forecasts from industry trade body Energy UK that raised wholesale costs could be baked into the market, with the potential for a further 15 per cent hike to the price cap in October.
EU President Ursula von der Leyen warned earlier this week that Gazprom supplies were already at ten-year lows in European storage, with Russian gas flowing around 45 per cent below expected levels.
Ronald Smith, BCS Global Market’s senior gas analyst told City A.M. that while Europe would struggle to deal with more than a short-term supply shock, the likelihood of Russia cutting off gas into European essentially depended on how much conflict ramped up in the region.
He said: “A full, deliberate cutoff from the Russian side is highly unlikely unless the situation significantly escalates from these levels.”
Smith also suggested that rerouting supplies to other markets outside of Europe would be highly challenging, despite claims from the Kremlin’s finance minister Anton Siluanov that Russia would shift supplies away from Europe if hit with energy sanctions.
He argued: “It is not realistic inside the next five years, and indeed it would involve significant logistical hurdles to be cleared.”
The analyst also noted that the currently proposed Western Route to China is still four years away from completion, and would still provide less than a third of Gazprom’s European exports.
Forecasting futures gas price movements, he said: “Assuming no cutoffs via Ukraine, Gas prices will probably ease as we get into the refill season in late March, but remain ‘very high’ until spring of 2023.”