European gas swings as traders weigh Russian sanctions outlook

European natural gas fluctuated as traders weighed the prospect of energy sanctions on Russia against currently stable supplies from the country.

Benchmark prices swung between gains and losses with Russian exports again in focus after the European Union said it's working on additional measures to penalize Moscow for what appear to be war crimes in Ukraine. The bloc is planning to propose a mandatory phaseout on coal from Russia, but isn't planning to sanction oil or gas for now, according to people familiar with the matter.

There is no unanimity regarding gas, EU foreign policy chief Josep Borrell said in an interview with Spanish radio Cope. The region depends on Russia for about 40% of its gas demand, and finding alternatives will be a massive undertaking, especially if the EU also needs extra volumes to replace Russian coal. 

Gas flows have been under close scrutiny recently after Moscow initiated ruble payments for the fuel, the implication of which are still being assessed by major European buyers. Many people are "hopeful" that the situation will stabilize and there won't be a complete energy embargo or Russia won't cut-off exports, Chris Weafer, chief executive officer of Macro-Advisory Ltd., said in a Bloomberg TV interview. 

"But it's becoming increasingly difficult to avoid" curbs in supplies, even though that would hurt both Russia and Europe, he said. "If energy exports were to be cut off, then Russia would be starved of that money, Russia would have a financial and severe economic crisis within months, but Europe would have a severe energy crisis -- probably by next winter."

For now, Russian supplies to the continent have been stable, even increasing since the invasion of Ukraine about six weeks ago. Together with robust LNG arrivals, some volatility in the market has eased after the wild swings of last month. 

Dutch front-month gas, the European benchmark, was 1.7% higher at 111.35 euros a megawatt-hour by 12:33 p.m. in Amsterdam, swinging between gains of as much as 2.3% and losses of 4.4%. The U.K. equivalent contract rose 1.8%.

Heating Season

The end of the winter heating season and stable imports have brought some relief for European consumers, but officials are not taking any chances. They're looking around for emergency supplies, including from the U.S. and Qatar, should Russian flows be disrupted.  

Governments are also urging companies and households to reduce energy usage. Storage sites that were depleted will need to be refilled in preparation for next winter, and any cuts in supplies could create a fresh price spike. 

"The storage facilities are currently only 25% to 27% filled," Filip Thon, chief executive officer at EON Energie Deutschland, said in an interview with RedaktionsNetzwerk Deutschland. The demand to refill storages will be high, keeping prices elevated, and "the situation is very tense, even without a delivery stoppage," he said.

Disclaimer: This article first appeared on Bloomberg and is published by special syndication arrangement.