(Bloomberg) -- The end of Russian natural gas flows through Ukraine will have a “negligible” impact on European prices, according to an assessment carried out by the European Commission.
There’s just roughly three weeks until a transit deal expires at the end of the year, cutting off the flows of fuel used for power generation and heating. Still, the termination of the agreement between Ukraine and Russia has already been priced into European gas markets, and the region will be able to find alternative supplies, according to an assessment by the EU’s executive branch seen by Bloomberg News. The analysis was designed to reassure member states and markets ahead of the expiration.
While European fuel prices are a far cry from the peaks reached during the crisis in 2022 — thanks to increased imports of liquified natural gas that replaced most of the Russian flows — they are still elevated, with many households and businesses struggling with high bills. The continent’s benchmark futures hit their highest levels in a year earlier this month as the market balance remains fragile, and even small disruptions have been sparking jitters.
“With more than 500 billion cubic meters of LNG produced each year globally, the replacement of around 14 billion cubic meters of Russian gas transiting via Ukraine should have a marginal impact on EU natural gas prices” the commison’s document, which is not yet public, states. “It can be considered that the end of the transit agreement has been internalized in the winter gas prices.”
Supply Concerns
The EU has long argued that member countries still importing Russian gas via the Ukraine route — most notably Austria and Slovakia — can do without the supplies. The commission has said it won’t enter into negotiations to keep the route open. Nevertheless, gas buyers from Slovakia and Hungary are continuing negotiations to keep gas flowing after the transit deal expires, with the proposal involving a swap deal between Azerbaijan and Russia.
Concerns over Russian flows have exacerbated recent price gains Europe’s gas market. That’s added to supply worries amid quickly depleting inventories in the EU, which are now lower than a five-year average for the first time since the energy crisis.
Still, the commission said that limited impact on gas markets following Gazprom PJSC’s decision to halt supplies to Austria’s OMV AG showed the effectiveness of anticipation in mitigating the effects of Russian supply cuts.
The commission said that member states had been able to reduce their gas demand by 18% since August 2022 compared with an average of the previous five years. The US is also set to bring on new LNG capacities over the course of the next two years, and those supplies could help the EU cope with any disruptions.
“The most realistic scenario is that the transit agreement will lapse and no Russian gas will flow through Ukraine,” the assessment said. The EU “is well-prepared.”
--With assistance from Elena Mazneva.
©2024 Bloomberg L.P.
