On March 18, 2014, Russia’s annexation of Crimea- formerly of the Ukraine- became official. This move sparked international condemnation, most notably from the Western powers, which threated to retaliate with a series of sanctions against the Russian oil and gas sector.
About 80 percent of Russian gas exports to Europe pass through Ukraine; in 2013, Europe depended on Russia for 30 percent of its imported fuel.1 According to the Wall Street Journal, gas is the continent’s second most important energy source, with Germany, the United Kingdom, and Italy making up the top European gas consumers in 2013.
Energy prices usually fluctuate promptly when escalating geopolitical tensions are expected to curb energy supplies. As such, one would expect that over the past few weeks, rising tensions between Russia and Ukraine would have pushed gas prices higher since market participants were worried about the supply- but did they?
Using ZEMA’s advanced analytical and visualization tools, I aim to recognize any evolving market patterns in the midst of a political tension between Russia and Ukraine.
The Ukrainian Crisis in Crimea
In late February 2014, the crisis began in the aftermath of the Ukrainian revolution with the interim appointment of the Yatsenyuk Government and the new Acting President of Ukraine, Oleksandr Turchynov. On 26 February, pro-Russian forces gradually took control of the Crimean peninsula. A few weeks later, a referendum was held in Crimea that showed nearly 96% of those who voted supported Crimea joining Russia. On March 17, 2014, the Crimean parliament officially declared its independence from Ukraine and requested to join the Russian Federation only one day after the referendum results were announced. However, the referendum had no international observers aside from Russia. This action from Russia sparked condemnation from the U.S and the European Union who called the vote illegal and vowed to retaliate against “Russian aggression” via economic sanctions and boycotts. Threats were also leveraged against individual Russians, including visa bans and asset freezes. All of these developments could potentially translate into supply disruption in the market- but let’s dive into the market analysis and see how things turned out for traders.
The Global Gas Markets and Spot Prices
In the midst of the political turmoil, it should be interesting to look at the gas market in Europe and North America to see how prices reacted to the news. Two major hubs in Europe were selected: Gaspool in Germany and the United Kingdom’s National Balancing Point (NBP). Henry Hub in Erath, Louisiana, is also included to show price fluctuations in the North American Market. Before conducting any other analysis, I’ll focus on the prices of the three hubs since the beginning of 2014 (Figure 1).
In Europe, spot prices continued to fall in the first three months of the year. From January to March 2014, natural gas monthly spot prices dropped by 14% at Gaspool from € 7.81 EUR/MMBtu to € 6.73 EUR/MMBtu and also at NBP from € 4.75 EUR/MMBtu to € 4.09 EUR/MMBtu. However, North American prices fluctuated more in the first quarter of 2014, as the ZEMA graph below shows (Figure 1). From January to February 2014, Henry hub natural gas day-ahead prices rose by 28% from € 3.37 EUR/MMBtu to € 4.31 EUR/MMBtu. However, prices dropped by 20% from € 4.31 EUR/MMBtu to € 3.45 EUR/MMBtu between February and March 2014. Although day-ahead prices dropped in March, the prices increased by 2% from January to March. Nevertheless, it is safe to say that natural gas prices in all the three observed markets fell in March 2014 compared to the last month. This shows that the prices were not pushed higher because of the anticipation of a disruption in supply; rather, they seem to be affected more by the slow global economic recovery disrupting demand.
The North American Gas Market and Future Prices
The Russian intervention in Ukraine may be opening up the case for easing restrictions on exports of the booming American natural gas production, as the U.S is willing to help its European allies by reducing their reliance on Russian oil and gas. While exporting American resources like natural gas to Europe could be considered a noble act in situations like this, there is a price tag associated with this move for the American people. Due to the shale revolution in the U.S and fracking technology, American industries are enjoying significantly lower natural gas prices than the rest of the world. American gas prices will rise noticeably if American gas is exported to Europe, as gas prices will be supported by European demand.
The graph below, created in ZEMA using ICE data, compares the average monthly prices of Henry Hub Natural Gas Futures in March 2014 (black line) vs. the same contract in February 2014 (blue line), while showing the spread between the two months on the second vertical axis (Y2, the right axis) with red bars for delivery in April 2014 to October 2015. On the Intercontinental Exchange (ICE), natural gas futures at Henry Hub for delivery until March 2015 dropped slightly by 2% in March 2014 (black line) compared to the previous month (blue line). The average of all values for the April 2014 through March 2015 natural gas contracts at Henry Hub that were posted between 03.01.2014 to 03.31.2014 was $ 4.55 USD/MMBtu, dropping from $ 4.65 USD/MMBtu from the last period (02.01.2014 to 02.28.2014). The fear of supply shortage seems to be dissipated with the tepid demand in the North American market since the demand for gas tends to slow down as the temperature rises in most part of the continent; however, prices gained $ 0.02 USD/MMBtu from May 2015 to October 2015, sings of an expected increase in demand. Although there are talks of lifting the export ban on U.S. crude oil and natural gas under the Energy Policy and Conservation Act (EPCA) to mediate situations like the Crimean crisis, the collective market participants opinion is that there would be no significant changes to EPCA for at least the next 12 months.
In the aftermath of Russia’s annexation of Crimea, there have been a lot of threats, teeth grindings and political maneuvers. Europe sanctioned Russian individuals in response to the Crimea takeover, but it faces inescapable economic realities that are far stronger than the repercussions Russia will face from these political maneuvers. Europe’s dependency on Russian energy and the continent’s current economic situation dismantle what is potentially most punitive weapon – blocking Russian energy exports. Although prices did not skyrocket at the European hubs in March, the supply risk factor will play a role in bumping up prices, as gas prices in the U.K. and Germany are expected to rise in April 2014 by 10% and 8% respectively, according to Bloomberg.2 Thanks to the shale revolution and abundant supply in the U.S., the North American market did not react to the supply risk factor as shown earlier.
The dynamic between politics and economics is always interesting to watch. In fundamentalist political systems, you can expect decisions that are less economically sound; however, this is not the case with the western countries, as most of their actions are economically justifiable. Threating to retaliate against Russia by imposing sanctions against its oil and gas sector make little, if any, economic sense in the current global economic condition.
At ZE, we collect, analyze, and integrate data from all global natural gas hubs. Our award winning software, ZEMA, is an end-to-end enterprise data management solution for energy, commodity, and financial market participants that helps organizations manage data efficiently. With ZEMA, you can easily visualize global energy markets as well as spot, future, and option prices to discover the trading patterns as they unfold in the market.
1. Kent, Sarah. “Pipeline Politics” The Wall Street Journal” Accessed March 30, 2014. http://graphics.wsj.com/Ukraine-gas/
2. Paulsson, Lars. “U.K. Gas Gains Most Since 2011 as German Prices Surge on Crimea” Bloomberg, March 3, 2014. Accessed March 31, 2014. http://www.bloomberg.com/news/2014-03-03/u-k-gas-has-biggest-gain-since-oct-2011-amid-ukraine-tension.html