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  • August 22nd, 2014

U.K. Natural Gas Trading Signals Ukraine Supply Concerns

Traders are bracing for higher European natural gas prices as the worsening conflict between Russia and Ukraine threatens to disrupt supplies of the fuel this winter.

Three of the four most-active natural gas options are calls giving the holder the right to buy U.K. gas futures this winter at levels at least 20 percent above current prices, data showed. The number of outstanding calls, known as open interest, for all months traded is the highest 2011. 

Over 2,000 people have died since April in fighting between Ukraine forces and pro-Russian separatists, which risks interrupting gas supplies to the European Union this winter. Russia supplies about 30 percent of Europe’s gas, half of which goes through Ukraine. Disputes between the nations last disrupted flows to Europe in 2009 amid freezing January weather. 

“Upside risk in gas is widespread due to geopolitical factors which have been plaguing the market so far this year,” said a gas broker in London by phone yesterday. “Open interest in calls reflects this intrinsic risk. I would expect the landscape to remain unchanged until these factors subside.”

Investors held options to buy U.K. gas at 75 pence a therm in January as of August 19th, exchange data showed with identical strike prices expiring in February and March. 

Open Interest 

U.K. gas for delivery in January has climbed 25 percent from this year’s low in April. The U.K. gas market is Europe’s biggest and acts as a regional benchmark. 

U.K. next-month gas prices have rallied 16 percent after trading at the lowest in four years in July. A mild winter left storage sites across the 28-nation European Union at their fullest for this time of year since 2008. The Ukraine risk premium built into British gas prices is about 5 pence to 7 pence a therm, according to a New York-based research company. 

Ukraine passed a bill last week that enables the country to impose sanctions on Russia for its support of separatists in the east. Curbs may include banning transit of Russian gas, which would force European countries to buy the fuel at Ukraine’s eastern border. 

“No one wants to be short in a market where long lines of unidentified Russian trucks are piling up on the Ukraine border and the Ukrainian government is making counter-threats to cut off Russian gas in transit,” a report said yesterday. “Ukraine fears mask broadly weak European fundamentals.”

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