Putin Threats Push U.K. Gas to Biggest Weekly Gain Since 2011

U.K. natural gas had its biggest weekly gain since 2011 after Russia threatened to halt shipments to Ukraine, a key transit route to Europe, and maintenance curbed deliveries into Britain.

Front-month gas rallied 7.5 percent this week on the ICE Futures Europe exchange in London, the biggest weekly gain since September 2011. Russia will have to halt natural gas shipments to Ukraine if payment violations continue, increasing the risk of disrupting transit to Europe, President Vladimir Putin said yesterday.

Putin’s threats echo those made before Russia halted supplies to Ukraine in January 2009 during a price dispute between the two former Soviet nations, interrupting flows to Europe, which gets about 15 percent of its gas via Ukraine. Supplies into the U.K. network are at the lowest for the time of year since at least 2007 amid maintenance at North Sea and Norwegian fields.

“Russia’s statement yesterday that they will cut natural gas deliveries to Ukraine demonstrates the Russian will to play the natural gas card,” Lysu Paez-Cortez, an analyst at Natixis SA, said by e-mail today. “Seasonal maintenance related supply cuts from Norway are also helping support U.K. prices.”

Front-month gas climbed 1.5 percent to settle at 52.1 pence a therm ($8.71 a million British thermal units) in London. Gas for the six months from October rose 5.5 percent this week to 64.058 pence a therm, its biggest weekly gain since May 2010.

Gas Prepayment

OAO Gazprom will be forced to switch Ukraine to prepayment on gas shipments and “in the event of further violation of the conditions of payment, will completely or partially cease gas deliveries,” Putin said in a letter to 18 European heads of state, according to a copy received by e-mail from the Kremlin press service. Europe should provide aid to Ukraine to ensure uninterrupted natural-gas deliveries to the region, Putin’s spokesman Dmitry Peskov said today. None of the European leaders have responded yet, he said.

Ukraine owes Russia more than $2.2 billion for gas imported through March, according to Gazprom, Russia’s pipeline gas-export monopoly. Exports from Russia to Ukraine have dropped after Gazprom increased the price by 81 percent earlier this month while shipments to Europe have climbed, according to the Russian Energy Ministry’s CDU-TEK unit.

Winter gas could rise above 80 pence a therm if European supplies from Russia through Ukraine are temporarily disrupted, Bank of America Corp. said today in a report

Month-ahead prices should stay in the 51-53 pence a therm range “barring any transit flow interruption in Ukraine,” Paolo Coghe and Thierry Bros, analysts at Societe Generale SA, said in a report today.

Bumpy Ride

“The longer we wait, the higher the unpaid gas bill, the closer we get to a new gas year (with renewed seasonal demand), and the greater the tensions,” the analysts said. “The scene is set for a bumpy ride in the months to come that could ultimately lead to the EU deciding to phase out fossil fuels much faster than expected in its first 2030 Energy Roadmap.”

While the U.K., Europe’s biggest gas market, gets no shipments directly from Russia, it is linked by pipelines to mainland Europe. Britain is set to export about 22 million cubic meters to Belgium today, the biggest volume since Sept. 1, according to Interconnector U.K. Ltd.

Lower Supply

Total gas flows into the U.K. are at 208 million cubic meters, the lowest level for the time of year since at least 2007, according to data from National Grid Plc, the network manager. Annual maintenance, usually carried out in the summer when demand is lower, is restricting supply into the Teesside processing plant in northeast England and from fields in Norway, Britain’s biggest foreign supplier.

The U.S. is prepared to impose “additional significant sanctions on Russia if it continues to escalate the situation in Ukraine,” Treasury Secretary Jacob J. Lew said in a statement after talks yesterday in Washington with his Russian counterpart, Anton Siluanov. The Ukraine crisis will “weigh on the outlook” for the Russian economy, Deutsche Bank AG said in a report e-mailed today, cutting its forecast for the country’s economic growth in 2014 to 0.6 percent from 2.4 percent at the beginning of the year.

“While European countries are trying to sort out how to help Ukraine, considering pipeline reversals from neighboring countries, important discussions are taking place between the U.S. and European authorities,” Paez-Cortez said. “All in all, we believe the Russia-Ukraine conflict will continue to affect natural gas markets beyond their borders.”

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