The Russian-Ukrainian crisis could cause gas prices to rise in Europe

Growing tensions between Russia and Ukraine have cast a shadow over energy markets, and the uncertainty could mean a prolonged period of high gas prices for Europe, analysts said.

“It’s a very tight gas market (…) and there’s no doubt that this feeling of impending crisis with Russia and Ukraine is also hanging over the market, especially since Russia supplies around 35 % of European gas,” said energy expert Dan Yergin. CNBC Monday.

If the crisis worsens, gas prices in Europe – which hit record highs last year – could rise further, research firm Capital Economics warned in a note this weekend.

William Jackson, chief emerging markets economist at Capital Economics, pointed out that in addition to Europe’s dependence on Russia for gas, inventories are also low at the moment.

“If sanctions were to be imposed on Russia’s energy exports or if Russia used gas exports as a leverage tool, natural gas prices in Europe would likely skyrocket,” he said.

Tensions between Russia and Ukraine have escalated in recent months amid multiple reports that Russian troops have amassed on the border with Ukraine.

The development has sparked speculation that Russia is preparing to invade the country and raised fears of a repeat of Moscow’s illegal annexation and occupation of Crimea in 2014. Moscow has repeatedly denied the claims.

Ukrainian Territorial Defense Forces, the military reserve of the Ukrainian Armed Forces, holding wooden replica Kalashnikov rifles, take part in a military exercise near Kiev on December 25, 2021.

Sergei Supinsky | AFP | Getty Images

Talks aimed at defusing the crisis ended last week without any progress.

US officials and NATO members have emerged from days of high-stakes talks with senior Russian officials with no resolution – but with warnings that the situation along the Ukrainian border is actually worsening.

The looming crisis has sparked talk that the United States could impose sanctions on Russia to prevent the Kremlin from invading Ukraine.

If that happens, according to Capital Economics, gas prices in Europe are likely to rise above the peak of 180 pounds per MWh seen at the end of last year.

“And some states that are very heavily dependent on Russian gas, particularly in Eastern Europe, may be forced to ration electricity,” Jackson added.

A massive gas crisis in Europe in the third quarter of last year caused electricity prices in Europe to soar to multi-year highs.

As it stood, Russia’s gas supplies were already below normal, Jefferies pointed out in a note on Sunday.

Gas imports from Russia to Northwestern Europe from August to December were down 38% from the same period in 2018, according to the US investment bank.

Gas inventories in Europe are also below average – and are down 21% as of January 12, compared to the five-year average, the company said.

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“We expect the period of high natural gas prices to continue. Gas flows from Russia will remain weak as we enter the 2021/22 heating season with record inventories,” Jefferies said.

“There was this tendency when this crisis started at the end of last year, to say ‘oh, this is a unique case,'” Yergin said, referring to the gas crisis in Europe in 2021. “But if you look at demand trends, the level of investment, you might see that it’s recurring.”

Christi C. Elwood