Spot drops, high stocks could handle any Ukraine cut

LONDON Tue Mar 4, 2014 3:31pm GMT

A gas hob is seen in this photo illustration taken in London December 2, 2013. REUTERS/Stefan Wermuth

A gas hob is seen in this photo illustration taken in London December 2, 2013.

Credit: Reuters/Stefan Wermuth

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LONDON (Reuters) - British gas prices on Tuesday fell from two-week highs as worries eased that the stand-off between Russia and Ukraine may cut gas supplies, but traders kept a risk premium for futures contracts in case the crisis deepens.

President Vladimir Putin on Tuesday defended Russia's right to send troops into Ukraine to protect compatriots he said were living in "terror" but also said he would use force only as a last resort.

British gas prices moved lower against a still volatile trading backdrop, with benchmark gas for delivery the next day slipping 2.25 pence since opening to 59 pence per therm at 1515 GMT.

Traders said that the fall in spot prices was a reaction to high gas stock levels across Europe, which would be able to cushion the effects of a short-term Russian supply cut.

Europe's biggest gas supplier Russia provides around a third of continental demand, with a third of that gas coming via Ukraine, posing a supply risk to consumers.

While the spot market dropped, traders kept a premium in place for contracts for delivery next winter, which was up 1.95 pence since opening to 58.10 pence a therm.

"The European winter has been mild this year and demand is about to tail off seasonally, (but) high inventory levels only provide a limited buffer and stocks will have to build for next winter too," Bank of America Merrill Lynch said on Tuesday in a research note.

"So should Russian gas supplies through the Ukraine shut down for a prolonged period of time, Winter 2014/15 UK gas prices could jump above 80 p/therm to help attract LNG (liquefied natural gas) supplies," it added.

Because Asian gas pays around twice as much for LNG cargoes than European utilities, major exporters like Qatar prefer sending their ships there.

"All eyes will now be on the first signs of physical supply disruption into Western Europe, which would push further risk premium into those prices, although a significant supply disruption this week would come as a surprise," analysts at consultancy Energy Aspects said on Tuesday.

Britain, which still has significant, albeit falling, domestic gas reserves and imports most its needs from Norway, is

better placed to handle supply disruptions than most of continental Europe, which relies more on Russia.

(Editing by William Hardy)

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