Russia-Ukraine gas cut drives UK market prices higher

Russia’s gas supply cut to Ukraine drove UK gas and power prices higher on Monday, boosting concern of a future supply disruption which could limit the possibility of consumer price cuts from the big six energy suppliers.

UK gas prices for near-term delivery jumped 6% higher on news that Russian energy giant Gazprom halted gas supplies to neighboring Ukraine, after Naftogaz failed to meet its deadline for the $1.95 billion it owes.

Ukraine will now receive only the gas that it has paid for in advance, Gazprom said, adding that it has stopped deliveries with immediate effect.

Despite the fact that no disruption to European gas supply has occurred UK gas and power prices climbed higher over the day.

Analysts at RBC Capital said UK gas prices for near-term delivery traded up from around 37 pence per therm at the end of last week to between 42-43 p/th on Monday, while gas for delivery this winter jumped from around 58 p/th to 61 p/th.

The risk of further price rises for gas and power means it is unlikely the UK’s energy suppliers will be willing to reduce retail tariffs despite strong political pressure to do so, the analysts warned.

“Until there is clarity on how the Ukraine situation will outturn, supply companies (the Big Six) are unlikely to heed calls from Ofgem to cut tariffs on forward curves that, until recently, have been falling from levels of over 70p/th at the start of the year,” an analyst note said.

Although vertically integrated companies will face increased pressure, generators could see a benefit to the higher wholesale prices.

“Second, higher gas prices will feed through into higher electricity prices, which is beneficial to UK generators, particularly the likes of Drax and Infinis which do not have gas as an input cost,” the note added.

Russia has said it will continue to export gas paid for by European companies, while Ukraine has assured the European Commission that it will not siphon off gas intended for European customers to meet its own needs.

Analysts at Citigroup added that the impact of Gazprom’s gas cut has been muted by the fact that it is occurring in summer, amid unusually well-supplied gas markets.

“While things may get worse before they improve, we think it better for all sides to have brought this issue to a head now – in low-demand summer when European storage is unusually full following a warm winter – rather than later in the year when Europe’s supply/demand balance would be less able to deal with a potential disruption of flows via Ukraine, should things escalate further,” said Citigroup.