European natural gas prices reached their highest point since November 2023 on Tuesday, driven by the impending expiration of a transit agreement between Russia and Ukraine. The current five-year deal, allowing Russian gas to flow through Ukraine to central Europe, concludes on December 31, 2024, with no new agreement yet in place. This uncertainty has sparked concerns about potential supply disruptions and sent prices soaring.
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February natural gas futures contracts jumped as much as 4.5% on Tuesday, reaching €50 per megawatt-hour. The expiring transit agreement covers approximately 5% of Europe’s total gas demand. The lack of a replacement agreement, coupled with Ukrainian President Volodymyr Zelenskiy’s refusal to endorse any deal financially benefiting Russia amidst the ongoing conflict, has injected significant volatility into the market. Benchmark futures have surged over 50% this year due to these supply concerns.
Looming Supply Halt and European Preparedness
The anticipated halt in gas supplies, primarily impacting Slovakia and other central European nations, coincides with predictions of freezing temperatures in January. This weather forecast, combined with faster-than-usual depletion of gas inventories, raises concerns about Europe’s ability to meet storage targets for the upcoming heating season.
Slovakia’s Prime Minister Robert Fico has intensified pressure to maintain gas flows, threatening to cut power supplies to Ukraine if shipments cease. He has urged the European Commission to address the imminent supply disruption, warning of potential price increases across Europe.
Conflicting Perspectives on the Impact of the Halt
While acknowledging the political complexities surrounding the expiring agreement, Dmytro Sakharuk, CEO of Ukraine’s D.Trading, downplayed the potential for significant market disruption. He asserted that Europe is well-prepared for a supply halt and that current prices already reflect this anticipated outcome. Sakharuk argued that the volume of gas currently transiting through Ukraine is insufficient to destabilize the regional market or create a substantial supply deficit.
This sentiment of preparedness is echoed by German officials. Klaus Mueller, president of the Federal Network Agency (BNetzA), stated that Germany has been conserving gas despite increased consumption, ensuring sufficient reserves for the coming months. He encouraged continued gas conservation efforts to mitigate potential price increases.
Market Response and Future Outlook
The Dutch Title Transfer Facility (TTF) natural gas benchmark, reflecting European gas prices, rose 4.3% to €49.90 per megawatt-hour on Tuesday afternoon. The market’s response underscores the ongoing uncertainty surrounding the Russia-Ukraine transit agreement and its potential impact on European energy security. The coming days will be crucial in determining whether a last-minute agreement can be reached or if Europe will face a significant gas supply disruption in the new year. The outcome will significantly influence European gas prices and energy policy in the near future.
