Ukraine pipeline sabotage may signal start of greater market volatility, traders warn

Tuesday’s gas pipeline explosion in Ukraine could signal the start of increasingly volatile trade on the UK’s gas and power markets, traders have warned.

The blast did not result in any supply disruption of Russian gas exports to Europe and occurred at a time of ample gas supply across Europe and low summer demand, but still triggered a dramatic surge in pricing levels on the UK’s gas market.

Over Tuesday afternoon gas for delivery in July rallied suddenly to 41 p/th from 40.15 p/th ealier in the day. The contract price has eased back by Wednesday morning to 40.60 p/th but remains stronger compared to the same time the day before.

Traders have voiced concern that as political tensions between Russia and Ukraine continue to mount the incidence of sabotage could increase, which during the winter months especially could have a more severe impact on pricing levels.

“That’s what everyone is afraid of,” a trader said.

In addition, analysts have suggested that UK utilities are unlikely to succumb to the political pressure to reduce retail tariffs while market uncertainty persists.

The Ukraine government confirmed Wednesday that the explosion was an act of sabotage and that pipeline security would be stepped up in response.

Reuters quoted the country’s interior minister Arsen Avakov as saying: “We foresaw some weeks ago that sabotage action would be planned – the aim being to undermine Ukraine’s reputation as a reliable transit partner,” Yatseniuk said.

Political instability in the region has already taken a toll on UK energy market stability with prices rising 6 per cent higher on Monday following 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.