European gas prices soared more than 10 percent after Russia announced that it would suspend gas supplies to Poland and Bulgaria for refusing to pay in rubles for Russian gas.
Poland said that it wasn’t interested in renewing the agreement.
However, Bulgaria looks to be more vulnerable. While the country is a small gas consumer (about 3 billion cubic meters per year), Russia meets more than 90 percent of its gas needs, according to the report.
Oil and diesel prices surged after reports surfaced that Russia had cut off gas supplies. That was triggered by concerns that a reduced supply of natural gas to Europe would force the continent to rely on alternative forms of energy, primarily oil and diesel, which are already in short supply globally, Phil Flynn, analyst at Price Futures Group, said in a note.
“The news helped feed the diesel price squeeze driving the ultra-low sulfa futures contract to an all-time record high close of $4.4679 after a move of epic proportions,” he wrote.
Prices eased after it was reported that some European countries agreed to Russia’s demand.
Ten European businesses have opened accounts at Gazprombank to ensure that they can make ruble-denominated payments.
Despite initially refusing to comply with the Kremlin’s demand, Italian energy giant Eni reportedly is opening ruble accounts for Russian gas.
German Finance Minister Christian Linder told the public that there’s no evidence yet that Moscow will cease shipping to Europe’s largest economy and biggest buyer of Russian gas.
Berlin has stated that it’s prepared to support the European Union’s embargo on Russian energy if it’s gradual. But Germany is vulnerable to any such measures, with experts estimating that it might face a $240 billion hit to economic output over the next two years if there’s a substantial disruption in oil and gas flows.
No other European market has reported gas cuts from Russia.
In recent weeks, several EU members have asked for clear guidance from the bloc’s leadership on Russia’s rouble demands, noting that the current recommendations are too ambiguous.
European Commission President Ursula von der Leyen has urged EU countries to refrain from conceding to Russia, adding that this would violate Western sanctions.
In a call with reporters last week, Kremlin spokesman Dmitry Peskov refrained from naming the states that had acquiesced to Russia’s request, noting that this information wouldn’t be made public. He added that Moscow “will not do charity” by shipping free energy to Western countries.
Von der Leyen called Moscow’s move to disrupt flows to Bulgarian and Polish consumers unacceptable, likening it to “an instrument of blackmail.”
British Deputy Prime Minister Dominic Raab reiterated Russia’s status as an “economic pariah.”
While some market analysts believe the loss of access won’t have an immediate effect, it could lead to more of a long-term risk for the European economy and its energy landscape.
“Poland and Bulgaria together losing access to Russian gas has not had a big impact on the total European market, but a more severe consequence is likely if other large countries or individual buyers are being cut off such as Germany and Italy,” Kaushal Ramesh and Nikoline Bromander, senior analysts at Rystad Energy, said in a note.
“Indeed, this action by Russia should be viewed with the caution of a precedent.”
The potential escalation by Russia could ignite a spillover effect into other energy markets, including Asia, Warren Patterson, the head of commodities strategy at ING, said in a research note.
“This latest move by Russia and the very real risk for even further escalation suggests that European gas prices will remain well supported,” he wrote. “This will have a spillover into other gas markets, particularly the Asian market. Europe will have to increasingly compete with Asia for flexible LNG [liquified natural gas] supply, which will keep Asian spot LNG prices well supported.”
There has been some speculation that the United States could urge Asian markets, like Japan, to ship some of their LNG imports to Europe to help mitigate an intensified energy crisis.
In March, the White House and the EU sealed a high-profile deal to ship more U.S. LNG exports to Europe.
Moreover, a growing number of trading houses with long-term agreements to ship LNG to Asia have chosen to pay the hefty termination fee and redirect these cargoes to Europe, with the prospect of earning more money.
