Ukraine tension seen stoking oil, gas prices on supply risk

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Heavily-armed soldiers without identifying insignia guard the Crimean parliament building shortly after taking up positions there on March 1, 2014 in Simferopol, Ukraine.

Oil and natural gas rose amid investor concern that escalating geopolitical tension over Ukraine could curb energy supplies.
Brent crude advanced as much as 2 percent to $111.24 a barrel on the ICE Futures Europe exchange in London today. Gas futures jumped as much as 2.8 percent to $4.736 per million British thermal units in electronic trading on the New York Mercantile Exchange, after sliding 25 percent last week.
“The market will be incredibly nervous, and that caution should push prices higher,” Ole Hansen, a Copenhagen-based strategist at Saxo Bank A/S, said yesterday by phone before the resumption of trading today.
The standoff over Ukraine, the main conduit for Russian gas to consumers in Europe, intensified over the weekend as the former Soviet state put its forces on combat readiness and Russia’s President Vladimir Putin threatened to invade. Wholesale gas costs jumped in January 2009 after Russian supplies via Ukraine halted amid a dispute over prices and transit terms. Europe’s biggest gas stockpiles for at least four years are helping damp the impact of any potential disruption.
“If there were a disruption, and there’s no sign of one yet, Europe is in a better position to handle such a situation,” Robin Mills, the head of consulting at Manaar Energy Consulting and Project Management, said yesterday by phone from Dubai. “The Europeans have made a big push to develop gas storage and strategic interconnections between countries,” including the Nord Stream pipeline from Russia to northern Germany, he said.
Mild winter
The mildest weather since 2008 reduced demand for gas, used for power generation and heating, and sent prices to their lowest level in two years. European gas demand in 2013 was at its lowest since 1999 and is set to drop further this year, erasing 16 years of growth, Societe Generale SA said Feb. 20.
Storage of the fuel in the U.K., the region’s biggest market, is 25 percentage points above average for this time of year, while levels in the Netherlands are 19 points above the mean, data from National Grid Plc and Gas Infrastructure Europe showed last week.
Next-month gas in the U.K. closed at 56.15 pence a therm ($9.41 per million Btu) on Feb. 28, compared with 68.91 pence at the end of December on the ICE Futures Europe exchange. U.K. gas usage is near a 12-year low amid mild weather that cut heating demand. European gas storage was about 50 percent full on Feb. 23, against about 42 percent a year earlier, data from Gas Infrastructure Europe in Brussels show.
Missing barrels
“It’s more gas prices that could feel the impact of the situation than oil,” Hansen said. “The oil market is very well supplied. There’s about 3.5 million plus barrels off the market at the moment, and if any of those were to come back, it would ease things even further,” he said, referring to constraints on supply from producers including Libya and Iran.
Russia’s biggest crude grade, Urals, is shipped from ports on the Black Sea, where Russia and Ukraine share a coastline, and the Baltic Sea.
Hansen estimated that the Ukraine crisis might add a risk premium of as much as $5 a barrel to crude prices. U.K. gas prices also face a potential increase, he said.
Russian budget
“Still, one thing is politics and the other is business,” Hansen said. “Russia needs revenue now so they can’t afford to cut off gas supplies to Europe.”
Russia receives about half of its budget revenue from sales of oil and gas. Graham Freedman, a senior analyst for European gas and power at Wood Mackenzie Consultants Ltd. in London, played down the risk of a supply disruption.
“There’s a lot of saber-rattling,” Freedman said yesterday by phone. “Until there’s an actual conflict, Russian supplies to Europe are unlikely to be affected, as it wouldn’t serve either side.”
The Nord Stream link under the Baltic makes Russia less dependent on Ukraine as a transit state than in 2009, Richard Mallinson, an analyst at Energy Aspects Ltd. in London, said yesterday by phone. “We would need to see a prolonged supply halt before the market reacts,” he said.
Manaar’s Mills said he’d be surprised if rising uncertainty over Ukraine had no effect on prices.
“U.K. gas prices could rise on general market sentiment,” he said. “There will be a sure impact on oil.”

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