The price of natural gas in Europe leapt sharply on Monday as Russia’s move to take control of Crimea fuelled fears of possible supply disruptions. In heavy trading, ICE April UK natural gas jumped 9.5 per cent to 61.5p a therm. A Dutch equivalent rose 9.4 per cent to €0.2525 on worries that Russia would stop exporting gas to Ukraine with knock-on effects for European consumers. Global benchmark prices of wheat and corn, both major exports of Ukraine, also rose, as did oil prices.
Russia supplies about 30 per cent of Europe’s natural gas, with almost half of it piped through Ukraine. The last time Russia cut supplies to its neighbour in 2009, it caused serious disruptions as Ukraine drew on gas destined for customers in Europe. However, analysts say Ukraine’s gas network is less important than in the past because of new infrastructure, such as the Nord Stream pipeline that goes into northern Germany from Russia, that has opened since 2009 and which bypasses the country. "Gazprom’s Nord Stream pipeline has an additional 32bn cubic metres of unused capacity, based on last year’s operating levels, meaning that half of Ukraine’s gas volumes could be substituted into this pipeline,” wrote analysts at Bernstein Research in a report.
Traders say Monday’s spike in European gas prices needs to be seen in context. Last week, front month UK gas futures hit their lowest level since December 2010, a reflection of a warm start to 2014 for much of Europe. A relatively mild winter has also left European gas inventories at very comfortable levels with only one winter month remaining, providing a further buffer against any major disruption. Bernstein estimates there was 40bn cubic feet of gas in storage by the end of February, 10 per cent higher than the same period a year ago. Nevertheless, a disruption of Russian gas supplies into Ukraine, which has not happened yet, would lead to higher prices.
"If there was a prolonged disruption to gas supplies (say three-four weeks), then concerns would certainly start to build about supplies and the availability of gas to refill storage through the summer, which could translate into higher prices for 2014 summer contracts and 2014/15 contracts,” says Richard Mallinson, analyst at Energy Aspects. However, Thierry Bros, analyst at SG Securities, says it is not in the interests of Gazprom, the Russian gas company, to see a long disruption to supplies. "All parties have a vested interest in gas continuing to flow,” says Mr Bros. "Russia, because it needs the money; Gazprom, because it has contractual obligations; Ukraine, because they need the transit fee; and Europe, because they need the gas.”
Ukraine has emerged as a substantial grain exporter in the past decade, and its importance to world trade is set to increase. It now vies with Argentina for the rank of the world’s third largest corn-exporting country.
US-based Cargill, the world’s biggest agricultural trading house, opened a Ukrainian base of operations in 1991. In recent years, it has acquired or built grain silos, sunflower seed processing capacity and an animal feed mill in the country. Rival traders, including New York-listed Bunge and Archer Daniels Midland and Swiss-based Glencore, also have businesses in Ukraine, including processing plants and export terminals on the Black Sea
Ukraine accounts for one-sixth of global corn exports and is also a top 10 wheat and barley exporter. Overall, only the US had been expected to export more grain in the 2013-14 crop marketing year than Ukraine’s 30m tonnes.
Traders say the Ukrainian export market has dried up entirely since the weekend, with no sellers willing to commit to new deliveries of grain given the uncertainty over the political and security outlook.
"There are no offers whatsoever today,” said Swithun Still, managing director of Solaris Commodities, a Lausanne-based grain trader specialising in Russia and the former Soviet Union.
Meanwhile, gold rose by as much as 1.8 per cent to a four-month high of $1,350 a troy ounce on Monday. Edel Tully, precious metals strategist at UBS, says the increased buying was directly related to the events in Ukraine.
"As long as tensions remain in Ukraine and the market is in safe haven mode, gold will do well,” Ms Tully says.
