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European gas jumps as energy conflict with Russia escalates

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Natural gas prices in Europe surged after Russia said it may cut off supplies via Ukraine, the last route still delivering the fuel to western Europe.

Benchmark futures rose as much as 14%, jumping for a second day. The warning ratchets up the energy conflict with Europe, coming just after major leaks were reported on the Nord Stream pipelines that European authorities are calling an act of sabotage. The situation heightens concerns over shortages with the heating season just days ahead, and counters efforts by nations to steadily fill up storages and curb consumption.

Russia’s Gazprom PJSC warned Tuesday that flows through Ukraine were at risk because of a legal spat with NJSC Naftogaz Ukrainy. If these are halted, western Europe would be cut off, leaving just the TurkStream pipeline sending gas to Turkey, and some south and southeastern European countries. Supply via Ukraine were stable on Wednesday, but at the reduced levels seen since the war. Naftogaz CEO Yuriy Vitrenko said an arbitration against Gazprom will proceed.

The gas market has been roiled this week easing nerves over shortages and blackouts over the previous few days had sent gas prices tumbling from their August peaks. But risks have returned after the powerful underwater explosions in the Nord Stream pipeline left massive streaks of gas bubbling in the Baltic Sea. It dashes any hope that the link, which has been shut over the past month, will return.

Attention will now turn to how the European Union responds. Josep Borrell, the EU’s foreign policy chief, said the damage to the pipelines was deliberate, and that the bloc will take more steps to secure its energy facilities.

“This incident looks like an attempted kill shot to prevent Russian gas from ever returning to the European gas market,” said Katja Yafimava, senior research fellow at The Oxford Institute for Energy Studies. “It is a bridge-burning exercise, but who did it is an open question.”

A “real nightmare scenario” would be if sabotage attempts extended to other pipelines, analysts at Deustche Bank Research said in a note. Norway is looking to increase security around its own infrastructure.

Dutch front-month gas, the European benchmark, rose 13% to 209.61 euros per megawatt-hour at 9:50 a.m. in Amsterdam. The UK equivalent increased 23%.

Annex territories  

Tensions also rose as Russia moved to annex a large chunk of Ukrainian territory after it declared victories in hastily organized referendums it held in the territories currently occupied by its forces and prepared to absorb them within days.

The worsening of the energy crisis increases Europe’s dependence on liquefied natural gas and leaves it more exposed to any disruptions in US supplies. Hurricane Ian has led to some production in the Gulf of Mexico being shut, raising concerns that this source of supply could also be limited.

The events in Europe have also prompted gas prices to rise in other parts of the world as competition for fuel intensifies. US gas for November delivery increased 1.5%. Asian LNG futures for the same month climbed 13% on the New York Mercantile Exchange on Tuesday.

© 2022 Bloomberg

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