18 Mar 2014 More

Natural Gas Prices in Europe Supported by Supply

posted by Brown Books @ 08:46 0 Comments

Natural gas prices and storage tanks
Even as the conflict in the Ukraine accelerates, natural gas prices remain stable for ample supply.  Unusually high levels of gas supply in Europe means that even if there are disruptions in LNG output, it should not send gas prices through the roof.

In the UK, gas prices have risen by as much as 3.8 percent since the crisis began.  Still, they are at their lowest levels since 2010.  Brent crude fell by 2.3 percent, just below peak prices of 2010.

Russia supplies Europe with 1/3 of all its LNG supply.  Half of this moves through the Ukraine.  In the past three years, other aspects of the Russian economy have slowed, making the country increasingly dependent on revenue from oil and gas exports.

“This is basically a hydrocarbon version of Mutually Assured Destruction,” says Seth Kleinman of Citigroup London. “Europe needs Russian energy and Russia needs Europe’s money.”

Russian gas moving through the Ukraine was interrupted back in 2006 and 2009, but in both those years winter temperatures were colder than normal.  This time, Europe is having its mildest winter in 7 years.  Measurements show that stockpiles are at 45 percent in Europe as of March 13, up from just 34 percent one year ago.

Bypassing the Ukraine

The Russian gas-pipeline company OAO Gazprom has already bypassed the Ukraine with its Nord Stream.  The pipeline moves gas to Germany by way of the Baltic Sea and right now is only 30 percent utilized.

“Since everybody expects the vote in favor of Russia, in that case the price impact should be limited,” says Carsten Fritsch, analyst at Commerzbank AG.  The exception would be if “the EU imposes sanctions on the energy sector, which is rather unlikely.”

Normal Ukrainian flow

Even with backup options, so far the flow of natural gas through the Ukraine has not been disrupted.  Last year, Russian crude oil flowed through the Ukraine at a rate of 300 mbopd.  In act, that is only about 1/10 of all the oil exported by Russia to EuropeRussia exported 3.05 mmbopd to Europe last year.

Even as the conflict continues in the Crimea, the benchmark European Brent crude moved down by 1.9 percent to $106.56.  Prices initially surged at the beginning of the conflict but now with no disruption in either natural gas or crude oil having been reported, have settled back down.

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