European gas surges as Putin orders forces to separatist areas

[LONDON] European natural gas surged after Russian President Vladimir Putin signed an order to send what he called "peacekeeping forces" to the 2 separatist areas of Ukraine that he officially recognised on Monday (Feb 21).

Gas traded in the Netherlands surged as much as 13 per cent, rising with other commodities such as oil and gold. Russia's move is a dramatic escalation in its standoff with the West over Ukraine, with the White House and the UK planning to announce sanctions on Tuesday.

There were no details on how many troops might go in, or when, but a conflict could threaten Russian gas supplies to Europe, about a third of which typically travel through pipelines crossing Ukraine. Sanctions would also disrupt energy trading, with curbs to Russia's ability to trade in foreign currency likely to upend commodity markets from oil and gas to metals and agriculture.

"This means yet higher gas prices for longer as the market has already been very nervous for months," said Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies. "Some US, EU sanctions are likely to follow." Dutch gas futures, a European benchmark, jumped to 82 euros a megawatt-hour before trading 10 per cent higher at 80 euros by 7.01 am in Amsterdam.

Russia has previously accused Ukraine of having a significant deployment of its own soldiers on the line of contact with the separatists in Donetsk and Luhansk.

While Russia could argue that Putin's recognition of the breakaway regions gives a legal basis for the presence of its troops, the move will likely fuel US and European concerns that Moscow is moving to take control of territory internationally recognised as part of Ukraine. Moscow denies it plans to invade.

European Union ambassadors meet on Tuesday to discuss a plan for sanctions in response to Putin's decree, although it could take days to finalise a package.

Commission President Ursula von der Leyen said in a Tweet that Russia's recognition of the 2 separatist territories is "a blatant" violation of international law, Ukraine's territorial integrity and the Minsk agreements. "The EU and its partners will react with unity, firmness and with determination in solidarity with Ukraine," she said.

Europe has been grappling with an energy crisis that's sent gas prices quadrupling in the past year. Russia has been keeping flows capped since the summer, having curbed sales in the spot market and failed to fill its storage sites in the European Union before the winter. While Europe has avoided the worst prediction for the crisis including rolling blackouts, the region still depends on Russia for a third of its gas needs.

The US and its allies continue to warn it could soon invade its neighbour, and just what sanctions the West chooses to impose will be key for commodity markets. Over the weekend British Prime Minister Boris Johnson said that the U.K and US could stop Russian companies from trading in pounds and dollars if Moscow went through with an attack.

There's also concerns that an invasion could lead to the suspension of the controversial Nord Stream 2 pipeline linking Russia to Germany and bypassing Ukraine. The pipeline's approval process has been on hold since the end of last year as the operator tried to comply with European Union rules as requested by the German energy regulator.

"A further delay in resumption of NS2 certification process is likely," Yafimava said.

Europe is in a much better position to face supply disruptions now than at the end of last year. Mild weather and a fleet of US liquefied natural gas slowed withdraw from storages, and inventories that had fallen to a record should be back within the five-year range before the end of the month.

"We believe there is a sufficient inventory buffer for TTF prices to continue to slide lower over the European summer," JPMorgan Chase said in a report, referring to prices on the Dutch Title Transfer Facility, Europe's biggest hub. BLOOMBERG