Financial markets do not trust the Kremlin’s agreement to a limited ceasefire in the war in Ukraine: Prices for oil, natural gas and gold prices increased on the news, even though the ceasefire is meant to put an end to attacks on energy and infrastructure for 30 days.
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The agreement, brokered by the U.S. President Donald Trump initiated negotiations with his counterpart Vladimir Putin during a nearly two-hour phone call clearly disappointed energy traders: Many had expected Trump to find a “quick resolution” of the war as the precondition of an eventual restart of Russian gas transits through Ukraine prior to this winter.
Market’s immediate reaction was disappointment, and prices mirrored that: After falling during the day, yesterday oil prices increased by more than $0.5 per barrel on the news.
Similarly, gold prices increased by $3 per ounce, while TTF front-month prices also went up from €43.50 to €43.64 per megawatt-hour (MWh).
“The likelihood of an imminent increase in Russian oil and gas supplies in the market has decreased,” commented Rystad’s head of geopolitical analysis, Jorge León. Instead, he a permanent peace agreement will now have to be set out “through small steps over a longer period.”
Russian gas exports to Europe ‘unlikely to return’
Analysts agree that Russian gas exports to Europe are “unlikely to return,” and some hedge funds have cut positions at the Dutch TTF after amplifying price swings increased their value at risk (VaR). Technical buying will restart, Energy Aspects reckons, once prices TTF front-month fall to the low €40s per MWh.
Expiry on a gas transit contract between Russia’s Gazprom and Naftogaz Ukrainy has left Europe short of 15.4 bcm per year of Russian pipeline gas. A painful shortfall, yet a far cry from the 174 billion cubic metres per year (bcm/y) that Gazprom had exported to Europe exported five years ago.
Efforts of the European Commission to bridge the gap have diverted away from Russia and focus on the Caspian region instead. Azerbaijan’s President Ilham Aliyev promised last autumn the country will raise natural gas exports to the European Union this year to 13 bcm and 20 bcm/y potentially by 2027, though analysts caution bottlenecks on pipeline transit capacity could lead to a lengthy ramp up.
Turkey’s TSO Botas and Bulgartansgas also increased capacity at the Strandzha 1 entry point, allowing for larger flows from the Caspian Sea region. Botas’ role in facilitating Europe’s energy security is gaining ground: If Azeri or Turkmen gas supplies were absent, the EU could fall short of nearly 7.2 Bcm of gas per year and would need resort to importing LNG at a higher price to avert supply risks.
