European gas prices started the summer season at a five-year low, signaling easing concern about disruptions to Russian supply and below-average reserves.
In the U.K. market, the region’s biggest, gas fell 8.3 percent in March, the largest drop since December. Prices retreated as deliveries of gas by ship and Russian fuel through pipelines accelerated, boosting optimism that suppliers can refill inventories that are the smallest for the time of year since 2013.
Expanding shipments are diminishing worries that Russia and Ukraine won’t agree on a new gas-sales agreement, risking a repeat of the disrupted flows to Europe in the winters of 2006 and 2009. Europe relies on pipelines through Ukraine to get more than 10 percent of its gas. While a temporary accord ended Tuesday, the final day of the winter heating season, Russia agreed to extend Ukraine’s discount on gas prices for the next three months, which may enable it to refill storage sites.
“This is the least volatile time in the market in the sense that they got through the winter with few casualties, as we expected, and now have the summer months to rebuild storage,” Emily Stromquist, an analyst at Eurasia Group, said by e-mail on Wednesday. “April-May allows for a bit of breathing time to get a new deal done, so traders and European countries alike won’t be too concerned in the coming weeks.”
Gas for next-month delivery in the U.K., Europe’s biggest market, fell 8.3 percent in March to 45.89 pence a therm ($6.8 a million British thermal units), the lowest level for the time of year since 2010, on the ICE Futures Europe exchange.
Heating demand falls in summer, allowing users to inject gas into storage for next winter. Russian deliveries to Ukraine were halted for six months from June last year amid a pricing and debt dispute and a separatist conflict in eastern Ukraine, with supplies resuming under a European Union-brokered deal as the winter started. Russia approved the extension of the discount, provided that Ukraine meets its contractual obligations and pays its debt for previous supplies, Prime Minister Dmitry Medvedev told President Vladimir Putin Tuesday.
A 52 percent drop in Brent crude from June’s peak helped damp gas prices. It cut costs under Russia’s long-term contracts with European buyers, which are linked to the fuel with a time lag of six to nine months, and “will keep a lid on prices,” according to Andrew Shepherd, an analyst at BMI Research, a unit of Fitch Ratings Ltd.
“There isn’t the same political risk premium on gas supply as there is in the winter months,” Shepherd said by e-mail Tuesday. “Europe remains well supplied via a combination of pipeline imports and LNG -- with more LNG cargoes flowing to Europe from Atlantic basin countries as Asian LNG prices fall.”
U.K., Belgian and Dutch ports received 19 cargoes of LNG in March, the highest monthly total since October 2011, according to port and ship-tracking data compiled by Bloomberg.
Ukraine’s storage sites were 24 percent full as of Tuesday, compared with 26 percent across the 28-nation EU, according to data from Gas Infrastructure Europe. The country needs to add at least 12 billion cubic meters (420 billion cubic feet) of gas to its underground storage facilities to last through the next heating season without shortages, Russian Energy Minister Alexander Novak said Monday.
Ukraine has cut gas use and is sourcing fuel from the EU to reduce reliance on supplies from Russia. Ukraine didn’t request Russian gas for Wednesday and doesn’t need to buy fuel from its neighbor before EU-brokered talks on April 13-14, Energy Minister Volodymyr Demchyshyn said Wednesday.
“Russia appears willing to cooperate with requests from Ukraine that it extend the discount from the winter deal,” Stromquist said. “The biggest risk at this point to storage rebuilding efforts would be a breakdown” of a cease-fire agreement for the conflict in eastern Ukraine.