Traffic signs are seen in front of a gasoline station of Rosneft in Moscow. While Brent is typically the benchmark used to set the price on almost half the gas supply in Europe, the Russia-Ukraine conflict and demand fundamentals in the market are having a bigger impact on prices than the decline in oil.

Bloomberg

London

 The risk of disruptions to Russian natural gas flows through Ukraine this winter is protecting European prices from the rout that sent oil to a four-year low.

UK gas for next quarter fell 13% since mid-June, less than half the 29% plunge in Brent crude over that time. While Brent is typically the benchmark used to set the price on almost half the gas supply in Europe, the Russia-Ukraine conflict and demand fundamentals in the market are having a bigger impact on prices than the decline in oil.

First-quarter supply interruptions are still possible as Ukraine may struggle to pay Russia the full $3.1bn by year-end under an agreement brokered by the European Union last week for gas already consumed, according to Societe Generale. OAO Gazprom said it received the first tranche of payments yesterday. The EU, which gets 15% of its fuel from Russia via Ukraine, sought to avoid repeats of 2006 and 2009, when supplies to the bloc were disrupted amid freezing weather.

“Right now, gas prices in Europe are really linked to the Russian-Ukrainian crisis, so I don’t think the impact from oil is as big as it could be,” Edouard Neviaski, chief executive officer of GDF Suez Trading, a unit of France’s biggest utility, said in an interview in London. “Gas prices have gone down a little bit, but nothing of the same magnitude.”

First-quarter gas in the UK, Europe’s biggest market, declined 0.5% to 55.07 pence a therm ($8.77 a million British thermal units) by 8:56am on the ICE Futures Europe exchange in London. Brent fell as much as 1.4% to $81.63 a barrel, the lowest level since October 21, 2010.

The European gas benchmark is at its lowest for the time of year since 2010 after the region’s mildest year in half a century left storage sites at record levels.

Russia halted gas supplies to Ukraine on June 16, with Gazprom saying Ukraine’s debt stands at $5.3bn. The cut came after Russia annexed Ukraine’s Crimea peninsula in March and as a conflict between Kiev and pro-Russian rebels in the eastern part of the country killed more than 4,000 people. Brent crude started to slump in June as US production added to slowing demand in Europe and China. The oil slump, caused by a global oversupply as the US produces the most crude since at least 1983, may have the biggest impact on summer gas, which has the most “downside potential,” Neviaski said. The contract for the six months from April has lost 7.8% since June 19, when Brent reached its highest this year.

Russia will resume gas flows to Ukraine after it receives the first tranche of payment and cash for November supplies under the accord signed October 30 in Brussels. NAK Naftogaz Ukrainy paid $1.45bn yesterday, said Gazprom spokesman Sergei Kupriyanov, declining to comment when the upfront payment for November supplies may be made. Flows would halt if Naftogaz doesn’t pay the full amount by January 1, Russian Energy Minister Alexander Novak said October 31.

Ukraine has funds to pay for 4bn cubic meters (141bn cubic feet) of gas in November and December, said Energy Minister Yuri Prodan. The price will be about $378 a thousand cubic metres, according to the accord.

While the additional volume would help Ukraine, the nation would still face shortages in the event of a cold winter, according to Chris Main, a London-based analyst at Citigroup Inc. Ukraine’s average demand in the winter of 2012-13 was about 6bn cubic metres a month, he said.

The EU didn’t give any guarantees to Russia on Ukrainian payments, Marlene Holzner, an energy spokeswoman for the European Commission, told reporters in Brussels October 31. The eastern European nation can use funds under an existing EU and International Monetary Fund assistance package, possibly drawing €760mn ($952mn) from it ahead of schedule, she said.

The security of gas transit to Europe in 2015 is “still open to question,” Thierry Bros, a Paris-based analyst at Societe Generale, said in an October 31 report. The bank cut its first-quarter UK gas price forecast 12% to 61 pence a therm after the deal. The price fell 6.8% last month.

European gas demand is set to fall 9% this year, its fourth annual drop, according to Brussels-based lobby group Eurogas. Temperatures will be warmer than average this month in the mildest year since 1964 before plunging below normal this winter, according to forecaster MDA Weather Services.

“In Europe, it is much more about incremental demand, which has been incredibly mild to date, and what happens with Russia,” Christopher Bake, head of origination at Vitol Group, said in an interview October 29. “The geopolitical impact on European gas could be more sustainable short term.”

Naftogaz says the price it pays Gazprom under its long-term oil-indexed contract is higher than on spot markets in Europe. With crude falling, long-term supplies may become cheaper than on spot hubs, Bros said in an October 16 report.

“Years ago, it was actually the oil-indexed gas price that was lower than the NBP, it could happen again,” Anne-Sophie Corbeau, a researcher at the King Abdullah Petroleum Studies and Research Center, or Kapsarc, said in on October 29, referring to UK gas. “I always advise people: don’t put all your eggs in the same basket because you never know what could happen.”

Ukraine’s gas price from April onward as well as the size of its outstanding debt to Gazprom will be settled in a Stockholm arbitration court. Gas buyers from EON to GDF Suez have won price revisions from sellers including Gazprom through talks or arbitration after they posted losses selling gas into domestic markets. Oil’s drop probably won’t change the trend toward more spot indexation in contracts, Neviaski said.

“People want competitive long-term gas supplies and to be competitive in the long run, it means you need to be indexed on markets, so I don’t think the lower oil prices will change the trend we have been seeing for the past three to four years,” he said. “It can even help to accelerate the convergence.”