Gas is key in Russia-Ukraine conflict: Worldwide supply could be disrupted

Russian forces launched the long-feared attack on Ukraine on Thursday, sending shock waves through the financial markets, raising concerns about the consequences of gas supplies around the world.

Russian President Vladimir Putin has defied the first step of international condemnation and sanctions by announcing the start of a “special military operation” aimed at “demilitarizing” Ukraine.

As European gas prices bounced on news of the invasion, international benchmark Brent crude futures surpassed $100 a barrel for the first time since 2014.

Analysts at political risk advisory Eurasia Group said: “Although Western governments will likely exempt energy transactions from sanctions, the storm of new restrictions will force many traders to be extremely cautious about handling Russian barrels.” said.

“Gas transiting through Ukraine will likely deteriorate, affecting supply to many central and eastern European countries, and driving gas prices in Europe higher,” the authorities said. they added.

The USA, Canada, UK, European Union, Australia and Japan were among the countries that announced the first wave of sanctions against Russia targeting banks and wealthy individuals at the beginning of the week. A second round of sanctions is expected shortly.

Germany also halted a highly controversial gas pipeline project known as Nord Stream 2, bringing the region’s deep dependence on Russian gas once again on the agenda.

What if Russia turns off the gas?

The Russian invasion of Ukraine is one of the worst security crises in Europe in decades. It is also expected to have far-reaching effects on the global economy, especially given Russia’s role as the world’s second-largest natural gas producer and one of the world’s largest oil-producing countries.

Russia has been accused for several months of deliberately interrupting gas supplies to capitalize on its role as a major energy supplier to Europe amid the escalating dispute with Ukraine.

Indeed, this has prompted Russia to increase gas flows to Europe, which the International Energy Agency rarely does, and to ensure that storage levels are replenished to adequate levels at a time of high winter demand.

The Kremlin has repeatedly challenged allegations that state-owned Gazprom is using the gas as a geopolitical weapon, saying it has fulfilled its contractual obligations to customers.

Now, energy analysts are deeply concerned about the risk of a complete supply disruption in the EU, which receives about 40% of its gas through Russian pipelines, most of which pass through Ukraine.

If Russia cuts off its gas supply, it will likely have public health and economic consequences, as such a scenario could unfold, especially during the winter months and in the midst of the coronavirus outbreak.

Wood Mackenzie analysts say Europe can meet gas demand for now and is in a better position than it was at the start of winter. But the long-term outlook is more uncertain.

“Europe will need to pull every lever in the energy system to keep the lights on – reducing gas burning, running nuclear and coal plants; maximizing domestic gas production and pipeline imports; Convincing Asian buyers to use coal and release LNG.” said Filippenko, stating that even this would only be a temporary solution.

“If all Russian gas is cut off, Europe will have no chance to deal with it,” Filippenko said. said. “If all gas flows were to cease today, Europe could only manage in the short term given higher storage inventories and lower summer demand.”

“However, in case of prolonged outage, the gas inventory will not be able to be rebuilt during the summer. Before winter, we are faced with a catastrophic situation such as gas tanks being close to zero. Prices will be high. The industry must shut down. Inflation spirals. The European energy crisis could trigger a global recession.”

China’s unique location

Troy Vincent, senior market analyst at DTN Markets, told CNBC that there are “no alternatives to Russian oil and gas volumes that do not require much higher prices and the development of potentially serious shortages.”

“With that in mind, it’s easy to see how sanctioning Russia’s energy exports to both Europe and the rest of the world would make sense as a mutual destruction of economic growth and government budgets,” he said.

“Sanctions on Russian oil and gas mean higher energy prices all over the world,” Vincent said. Said. But he noted that China’s association of pipeline infrastructure with Russia and Beijing’s willingness to ignore US sanctions put the country in a unique position.

“China is likely the only major country globally to benefit from such sanctions, where it can increasingly buy discounted Russian volumes,” Vincent said.

CFRA energy stock analyst Stewart Glickman said in a research note Wednesday that he expects the Russian sanctions to have “pretty significant consequences” for energy markets.

CNBC

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