Amid heightened geopolitical tensions between Russia and Ukraine, natural gas seems to be more vulnerable to these developments than oil.
Supply disruptions and winter demand have been keeping investors on their toes in the natural gas market off-late.
Additionally, falling inventories have also resulted in an uptick in sentiments.
Over the weekend, Russia launched its biggest air strike on Ukraine in almost three months, wiping out its power grid system.
Since last Friday, Henry Hub natural gas prices on the New York Mercantile Exchange have risen almost 19% as tensions escalated.
In the last couple of sessions, the Dutch TTF gas prices have risen more than 5%.
In contrast, Brent oil prices on the Intercontinental Exchange have just risen by 3.6% over the last four sessions.
Analysts at ING Group said in a note:
European natural gas has been unable to escape the rising tension between Russia and Ukraine.
Ukraine’s use of Western weapons sparks tensions
After Russia attacked Ukraine’s power grid over the weekend, the latter carried out two strikes on Moscow’s border regions on Tuesday and Wednesday.
Washington had earlier this week allowed Ukraine to use US-made weapons to launch strikes deep into Russia. The Kremlin had warned that this would be a significant escalation.
After Ukraine attacked Russia’s border region Tuesday, using US ATACMS missiles, President Vladimir Putin said the threshold for nuclear weapons has been lowered.
In a further escalation, Ukraine fired a volley of British Storm Shadow cruise missiles into Russia on Wednesday.
The use of Western weapons by Ukraine has significantly escalated the situation in the region. Gas prices have reacted to these developments as a hefty amount of Russian gas exports transit via Ukraine currently.
According to think tank Bruegel, gas via Ukraine governed by transit contracts currently accounts for half of Russia’s remaining pipeline gas exports to the EU and a third of total Russian gas exports, including liquefied natural gas (LNG).
Replacing Russian gas
According to Bruegel, the EU would need an additional import of 140 terawatt hours (TWh) of gas supplies annually from other sources once the gas transit contract with Ukraine expires.
“The impact will be felt especially in Austria, Hungary, and Slovakia, for which the Ukrainian transit route met 65 percent of gas demand in 2023,” the agency said in a report.
Overall, the share of Ukrainian transit in EU gas imports has dropped from 11% in 2021 to about 5%.
Most Russian gas deliveries to Austria, Hungary, and Slovakia are currently under long-term contracts between their gas companies and Gazprom. These contracts are set to expire years into the future, Bruegel said.
ING Group analysts said:
However, up until now Russian pipeline flows via Ukraine remain stable.
Storage concerns
Meanwhile, European gas storage has fallen slightly below the five-year average for this time of the year.
Storage in Europe has fallen below 90% at present. The five-year average for storage in the region is 91%.
“The narrowing that we have seen between Asian spot LNG and TTF should mean that Europe starts to pull in more LNG as we move deeper into the winter months,” ING Group’s analysts added.
According to ANZ Research, withdrawals from gas inventories have accelerated due to strong demand for the winter.
During European winters, gas is used for heating homes and offices.
Additionally, investment funds remained bullish towards the European gas market.
Traders have increased their net long positions over the last reporting week to an all-time high, according to ING.
Analysts at ING further said:
With storage not as high as initially expected going into the winter and a number of supply risks, speculators continue to favour gas from the long side.
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