Europe’s Gas Market Is Still Counting on Russian Supplies

Liquefied natural gas, or LNG, is Europe’s main source of fuel, and prices in Europe’s Dutch heartland have been precarious. The benchmark rose 13% on Thursday as traders scrambled to gauge the effects of new Russian sanctions, before easing back slightly early Friday. German Economy Minister Robert Habeck said on Thursday that sanctions would cut about 3% of Russian gas deliveries to the country, which he said could be obtained from other suppliers.

Despite the volatility, the market may not be complete in a moderate supply disruption. The European LNG standard peaked at 227 euros a megawatt hour, or about $236, shortly after Russia invaded Ukraine. It has more than halved since then, although prices are still much higher than pre-pandemic levels.

Some might consider this week’s drama unsettling: Russia and Europe remain interdependent for energy, and the gas that flows through all of the region’s conflicts. With the trust gone, however, there are now real risks to supply. According to analyst Henning Gloystein, a Henning Gloystein analyst said:

There are physical risks. Ukraine is home to the transport infrastructure for about a third of Europe’s Russian gas imports in the last three months of 2021, and so are several oil pipelines. While Russian forces have concentrated back into the southeast of Ukraine, missile attacks continue across the country. There is a real chance that some energy infrastructure was affected, either intentionally or by accident. The hazards would complicate repairs, especially since Ukrainian shipping companies and Russian energy producers had a close relationship long before the invasion.

Politics can also cause supply disruptions. Sanctions initially helped cut off Europe’s energy flows, but no longer. The United States banned Russian oil purchases, and the European Union is finalizing a similar embargo. Those sanctions, or other developments such as Finland or Sweden seeking to join NATO, could prompt Moscow to retaliate by stopping gas supplies to more European countries. Kyiv may also be tempted to stem the flow that helps fund Russia’s forces of aggression.

To replace Russian gas, Europe will need to buy the entire LNG spot market, Shell‘S

executives said last week. While it’s technically possible, it’s not realistic. As a result, any significant supply disruption will create a shortage. A scenario where Russia completely cuts off energy exports to Europe, including gas, would likely cause price extremes, a sharp drop in demand, and possibly even power division, although power outages can still be avoided.

Rystad estimates that Europe’s current storage levels will last through most of 2022, excluding unexpected weather events. But the outlook for next winter is darker. Germany is most dependent on Russian gas, although estimates of the economic impact of this loss of gas vary widely, from less than 1% of German economic output, to 12%, in one analysis. include quadratic effects.

Pipeline diplomacy has kept Russian gas flowing into Western Europe for decades, but reasons to think this time are different keep coming.

Write letter for Rochelle Toplensky at rochelle.toplensky@wsj.com