Ukraine Risk Premium Fades for EU Gas on High Inventories

The biggest natural gas inventories in Europe since at least 2010 are deflating the risk premium stemming from the crisis between Russia and Ukraine, sending prices for supplies during the winter to a four-year low.

The winter contract in the U.K., Europe’s largest market, would drop 6.9 percent if the Ukraine crisis ended, according to the median estimate of seven traders, brokers and analysts surveyed by Bloomberg from July 3-7. Gas for the six months from October rose 6.5 percent on March 3, the first trading day after Russian President Vladimir Putin got approval to send troops into Ukraine, which carries about 15 percent of Europe’s needs.

Russia cut gas supplies to Ukraine on June 16 after OAO Gazprom and NAK Naftogaz Ukrainy failed to agree on a price for future deliveries and on debt payments, echoing similar disputes that saw flows to Europe reduced amid freezing weather in 2006 and 2009. High European inventory levels mean capacity is limited this year and demand upside is “minimal,” Citigroup Inc. analysts including Seth Kleinman said in a July 7 report.

“The risk premium related to Ukraine has been partially absorbed so the reaction of winter gas prices on the face of an end to the crisis would be limited,” Lysu Paez-Cortez, a natural gas analyst at Natixis SA in Paris, said yesterday by e-mail. “High stocks across major European hubs and seasonal lower demand also dented the geopolitical related risks.”

Winter gas on the U.K.’s National Balancing Point hub would fall to 52 pence a therm ($8.90 a million British thermal units) if the crisis ended, from an average of 55.86 pence on July 3-7, according to the median of the survey. Responses ranged from 45 pence to 53 pence.

Storage Levels

Prices for the fuel used for heating and power generation slid 1.1 percent to 55.21 pence a therm 3:37 p.m. in London after rising 0.9 percent yesterday, broker data showed. They are down 22 percent this year and reached 54.95 pence on July 7, the lowest for a next-winter contract since November 2010.

Nations in the European Union had 58 billion cubic meters (2 trillion cubic feet) of gas in storage yesterday, the highest for the time of year since at least 2010 and more than 72 percent of the capacity, according to Brussels-based lobby group Gas Infrastructure Europe. While gas demand for stockpiling is usually at its highest in the third quarter, Europe’s mildest winter in seven years left storages full.

Limited Impact

“Any impact from the end of the crisis in Ukraine will be very limited and temporary,” Moses Rahnama, an analyst at consultants Energy Aspects Ltd., said yesterday by e-mail. “We don’t think the risk has been priced in that much and the market will be much more sensitive to weather.”

U.K. winter gas was 19.9 pence a therm higher than fuel for day-ahead delivery, compared with a peak of 22.2 pence on June 9. The next-day, or prompt, contract fell 3 percent today to 35.2 pence a therm, and is down 47 percent this year as warmer-than-usual weather cut demand, broker data showed.

“Prompt is down mostly on lower consumption and demand for injection, which is relatively low, but winter is highly linked to weather,” London-based Rahnama said. “The chances of it being colder this year than last winter are higher.”

The warmer-than-normal weather seen this past winter is no guarantee that a cold season is on the way, according to Mike Thomas, a meteorologist at Commodity Weather Group in Bethesda, Maryland. The mild winters of the past 14 years have come in groups, with 2000, 2001, and 2002 ranked as warmer-than-normal, as were 2007 and 2008, he said yesterday.

Transit Obligations

Ukraine won’t take Russian gas destined for Europe and will fulfill all transit obligations, Energy Minister Yuri Prodan told reporters in Kiev today. Sergei Ivanov, the Kremlin’s head of administration, said earlier that Ukraine may start “stealing” fuel from transit pipelines in the heating season, according to Interfax. Gazprom accused Ukraine of siphoning gas in the 2006 and 2009 disputes, a charge the country denies.

“Comments on upholding gas transit through the country put further pressure on the NBP, taking some risk premium out of winter delivery contracts,” Wingas U.K. Ltd., a supplier of gas to the wholesale market, said in a report e-mailed today.

Storage facilities in Europe were filling up quicker than usual and were “two weeks ahead of schedule,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt.

Limited Capacity

Capacity is limited across Europe except for France, Citigroup said. French units were 58 percent full compared with 79 percent in Germany, 98 percent in the Netherlands and 81 percent in the U.K., GIE data show. France is one of the few countries with “large” summer demand for gas, Energy Aspects said in a report e-mailed today.

Front-month U.K. gas prices have fallen 16 percent since Russia cut supplies to Ukraine as fuel destined for European consumption continues to flow normally, according to Gazprom and Eustream, the Slovakian grid operator that’s monitoring pressure at the compressor station on the Ukrainian border.

“The decline in the NBP gas price also suggests that the Ukraine fear has disappeared,” Commerzbank’s Fritsch said by e-mail yesterday. “If the crisis ended, there could be a marginal blip in prices, but nothing spectacular.”

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