Natural gas is more susceptible to geopolitical tensions in Russia and Ukraine than oil.
Investors have been on edge in the market for natural gas due to supply disruptions and winter demand.
Falling inventories also contributed to an increase in sentiment.
Over the weekend, Russia launched an air strike against Ukraine, its largest in nearly three months. It destroyed its power grid.
Henry Hub natural-gas prices at the New York Mercantile Exchange are up almost 19% since last Friday as tensions have escalated.
The Dutch TTF has seen a rise of more than 5% in the last two sessions.
Brent oil prices at the Intercontinental Exchange, on the other hand, have only risen 3.6% in the last four sessions.
In a recent note, analysts at ING Group stated:
The tensions between Russia and Ukraine have not prevented the European gas industry from supplying natural gas.
Tensions sparked by the use of Western weapons in Ukraine
Following the attack on Ukraine’s electricity grid at the weekend, Russia launched two strikes against the border regions of Moscow on Tuesday and on Wednesday.
Washington allowed Ukraine earlier this week to use US made weapons to launch deep strikes into Russia. The Kremlin warned that the situation would escalate to a major level.
Vladimir Putin, after Ukraine used US ATACMS rockets to attack Russia’s border area on Tuesday, said that the threshold for nuclear weapons had been lowered.
On Wednesday, Ukraine launched a barrage of British Storm Shadow Cruise Missiles at Russia.
Ukraine’s use of Western-made weapons has escalated the conflict in the area. These developments have caused gas prices to rise as Russian gas exports are currently transiting through Ukraine.
According to the think tank Bruegel, gas via Ukraine governed transit contracts accounts for currently half of Russia’s pipeline gas exports into the EU, and a third total Russian gas exports including liquefied gas (LNG).
Replacing Russian gas
According to Bruegel the EU will need to import 140 terawatt-hours (TWh), of gas annually, from other sources after the transit contract with Ukraine ends.
The agency stated in a report that “the impact will be felt in Austria, Hungary and Slovakia where the Ukrainian transit route satisfied 65 percent of the gas demand in 2023”.
The share of Ukrainian gas imported into the EU has fallen from 11% to 5%.
Gazprom and Austrian, Hungary and Slovakia gas companies have long-term contracts for most Russian gas deliveries. These contracts will expire in the future.
Analysts at ING Group said:
However, the Russian pipeline flow via Ukraine has remained stable.
Storage issues
While European gas storage is slightly below its five-year average at this time of year, it has risen above the five-year median.
Storage in Europe is currently below 90%. Storage in Europe is currently 91% of the five-year average.
The analysts at ING Group added that “the narrowing gap between Asian spot LNG (TTF) and Asian spot LNG should mean that Europe will start to import more LNG as winter approaches.”
ANZ Research reports that withdrawals of gas from inventories are increasing due to the strong winter demand.
Gas is used to heat homes and offices in Europe during the winter.
Also, investors remain bullish on the European gas markets.
ING reports that traders have reached a record high in their net-long positions during the past reporting week.
Analysts at ING said further:
Gas from the long-side is still preferred by speculators, as the storage levels are not as high as originally expected for the winter.
This post, Why rising geopolitical tensions are more likely to affect gas prices, may be updated as new information becomes available.
