Goldman Says Russian Energy-Export Sanctions Are Unlikely

Western nations probably won’t impose energy export-related sanctions on Russia amid escalating tensions in Ukraine as Europe has little alternative to Russian gas, according to Goldman Sachs Group Inc. and Citigroup Inc.

Europe could displace Russian gas imports for eight weeks before prices need to rise to attract supplies of liquefied fuel, Goldman analysts led by Jeff Currie in London said in an e-mailed report dated yesterday. Spare capacity available on the Nordstream pipeline from Russia to Germany under the Baltic Sea wouldn’t cover lost volumes if Ukraine transit was disrupted, Citigroup said in a separate report dated today.

Russia, the world’s biggest energy exporter, called for an emergency meeting of the United Nations Security Council after Ukrainian security forces clashed with pro-Russian gunmen in the eastern town of Slovyansk. Ukraine is key to Europe’s energy security because pipelines crossing the country carry Russian gas making up about 15 percent of the region’s supply.

“In the worst-case scenario where energy flows are disrupted, we would expect the European natural gas market to tighten significantly,” Goldman said. “The global crude oil market becomes better supplied with U.S. and OPEC ramping up production on top of ample reserves today, suggesting a deflationary rather than inflationary impact.”

Camouflaged gunmen fired on Ukrainian government forces near Slovyansk, about 240 kilometers (150 miles) from the Russian frontier, Ukrainian Interior Minister Arsen Avakov said. “Henchmen” of the government in Kiev are organizing attacks with the backing of Western nations, Russia’s Ambassador to the United Nations Vitaly Churkin said at an emergency session of the Security Council in New York.

Gas Storage

U.K. natural gas futures extended their biggest weekly gain since 2011, paring their decline for the year to 23 percent after the mildest winter in seven years cut demand and left inventories brimming. Prices have been “relatively unresponsive” to the tensions between Russia and Ukraine and significant disruptions in Russian gas supply to Europe are unlikely, Goldman said.

Gas stockpiles in Europe were 48.1 percent full yesterday, compared with 20 percent at the same time last year, according to data on the website of Gas Infrastructure Europe, a Brussels-based lobby group. Contracted supplies have continued to flow “healthily” to western Europe from its two main suppliers, Russia’s gas-pipeline monopoly OAO Gazprom and Norway’s Statoil ASA, according to Citigroup.

Revenue Source

“A stoppage of Russian oil and gas flows to/via Ukraine or to Europe as a whole could be hugely impactful for oil and gas prices, especially if it is long-lasting,” said Citigroup analysts including Edward Morse. “A disruption of gas flows in the short run would be muted by current high storage in Europe due to the recent mild winter and the upcoming seasonal slowdown in demand.”

Gas exports to Europe are “an important source” of revenue for Russia, making reductions unlikely, according to Goldman Sachs. While Ukraine’s refusal to accept Russian gas until prices are discounted has raised the risk of cut-offs, a resolution is expected “in the near term” given the consequences it could have for all parties, Citigroup said.

European gas prices may need to fall further to boost usage in the power sector at the expense of coal, which could start to happen when prices fall below 45 pence a therm ($7.53 a million British thermal units), according to Citigroup. Front-month gas on the National Balancing Point hub rose 2.1 percent to 53.2 pence a therm at 12:41 p.m. in London.

“We believe that U.K. NBP prices are not likely to be unduly pressured,” Goldman said. “We still expect northwest European gas markets to remain well supplied this year.”

While a switch to gas may happen this summer, winter gas prices will make burning coal more advantageous, Citigroup said, forecasting U.K. prices at 56 pence a therm this year and 55 pence in 2015.

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