The Russian invasion of Ukraine led to strong volatility and a rise in contract prices across March. Russian supply makes up to 40% of Europe’s use of gas and sanctions could hamper the ability to receive gas as well as increase the cost of it. Alternative sources are required as Europe begins plans to reduce its reliance upon Russian gas. A deal struck with the US over supply of LNG into Europe was a step in the right direction. However, Europe’s realisation of there being no quick solution to the issue has contributed to an already fragile global gas system.
To mitigate risk further, the European Commission introduced new legislation that requires EU member states to fill their gas storage by at least 80% before next winter. Storage levels across Europe are already towards the floor of its 5-year historical average range, creating further pressure on future contract prices.
Outlook & Recommendations
European energy markets remain heavily affected by the Russia-Ukrainian war. Current European sanctions including Germany’s decision to halt production of the Nord Stream 2 pipeline have created long-term upward pressure. The latest proposal of EU sanctions against Russian coal, a ban on Russian ships entering EU ports and plans for banning oil imports are likely to create higher volatility across European markets. The threat of retaliation from Russia has also contributed to spooking the market. President Putin continues to issue statements that threaten a reduction in gas supply to Europe. The introduction of sanctions on Russian coal is likely to create a snowball effect on sanctions across the Russian energy sector. However, the EU remain reluctant to sanction Russian gas and oil due to its importance across the continent.
For the best avoidance of risk, it would be recommended to secure a contract as soon as possible with extreme volatility still possible if things escalate further in Ukraine. To reduce the burden of the strength shown for contracts in the closer term, it is advised to contract further out to reduce pricing and spread the risk as longer-term contracts continue to represent better value.