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Europe gas rises 60% with traders backing away from Russia deals

© Andrey Rudakov/BloombergA worker turns a valve wheel at a gas well on the Gazprom PJSC Chayandinskoye oil, gas and condensate field, a resource base for the Power of Siberia gas pipeline, in the Lensk district of the Sakha Republic, Russia, on Tuesday, Oct. 12, 2021.
A worker turns a valve wheel at a gas well on the Gazprom PJSC Chayandinskoye oil, gas and condensate field, a resource base for the Power of Siberia gas pipeline, in the Lensk district of the Sakha Republic, Russia, on Tuesday, Oct. 12, 2021.

European natural gas surged to a record as supply fears were compounded by traders trying to avoid exposure to a key Russian player in the market.

Benchmark futures rose as much as 60%, before easing. Gas and power traders are backing away from new deals with Gazprom Marketing & Trading Ltd., according to people familiar with the matter. There’s a further risk that companies start unwinding previously agreed contracts or clearing houses decide to stop doing business with the Russian company, liquidating their positions. Gazprom M&T denied that companies are cutting trading with them.

The war has sent commodity prices soaring — with Brent crude topping $113 a barrel on Wednesday — as buyers, traders and shippers remain wary of dealing with Russian supplies. Disruptions in gas supplies could also come from damage to infrastructure in Ukraine, but the risk of sanctions applying to energy “remains a real possibility,” said Kaushal Ramesh, a senior analyst at Rystad Energy.

But for now Russian flows continue, and have even increased since the invasion of Ukraine last week. Shipments arriving at the key European entry point of Velke Kapusany in Slovakia have rebounded to normal levels and gas flowed to Germany via the Yamal-Europe pipeline overnight, with more capacity booked for later on Wednesday.

Dutch front-month gas futures rose to above 194 euros a megawatt-hour, a record high, and were 36% higher at 165.15 euros at 12:22 p.m. in Amsterdam. The U.K. equivalent contract climbed 35%.

The price spike is similar to when gas rose to a then record high on Dec. 21, which was assumed to be because of “participants covering positions,” said Tom Marzec-Manser, an analyst for European gas and LNG at ICIS.

Halting dealings with Gazprom Marketing & Trading, which is involved in power and liquefied natural gas trading, could send ripples through the energy market. The company’s retail unit supplied gas to more than 177,000 industrial and commercial sites in the U.K. in 2020, according to the trader’s annual report. It also had agreements to ship gas to end-users in France and the Netherlands.

Europe relies on Russia for about a third of its gas, and any disruption could keep prices high for longer, making it difficult to refill storage facilities over the summer, and prolonging the energy crunch. Governments in the region are looking to boost LNG imports, which puts them in competition with Asian buyers also starting to replenish their stocks from March onwards.

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