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European energy markets rose steeply on Thursday while oil prices surged past the $100-a-barrel threshold amid fears Russia’s conflict with Ukraine would disrupt energy supplies to Europe.
Benchmark European gas prices increased by as much as 41 per cent to €125 ($141.6) a megawatt-hour on their fourth consecutive day of gains after Russian forces attacked targets across Ukraine in an effort to demilitarise the country, with the West vowing to impose further sanctions.
Meanwhile, oil prices topped $105 a barrel, a surge of 8.7 per cent, with expectations it will rise even further as sanctions could constrict supplies.
“The surge in the oil price is terrible news for businesses and consumers, and fundamentally this clarifies one of the key impacts of the Russia-Ukraine war — it will serve to further stoke inflation,” said Russ Mould, investment director at AJ Bell.
“Not only will energy bills keep going up, but food prices look set to jump even higher. Ukraine and Russia are both big food suppliers and any disruption to supplies will force buyers to seek alternative sources, which could jack up prices.”
Russia supplies 10 per cent of the world's oil and a third of Europe's gas, with significant volumes heading to the continent through Ukraine, mainly to countries such as Austria, Italy and Slovakia, as well Germany and Poland.
The latest crisis is a heavy blow to the security of the global energy industry, which is also striving to clean up its operations as the world advances towards a net zero goal by 2050.
Patrick Pouyanne, chairman and chief executive of French energy company TotalEnergies told delegates at International Energy Week in London that a secure supply is vital for Europe.
“While it is imperative to speak about climate when thinking about energy, the quality of energy is to be reliable, affordable and clean, and the events which are unfortunately happening today will remind many people, in particular in Europe, that the security of supply” and its reliability is one of the fundamentals customers expect from governments, he said.
As a result, Mr Pouyanne said it will also be key for Europe to invest in access to gas to protect itself from volatility.
It is possible Russia could suspend sales of gas to Europe in retaliation for any sanctions imposed by the West, or that military conflict could damage one of the pipelines that carries gas to Europe via Ukraine, analysts at the Oxford Institute for Energy Studies said.
However, Mr Pouyanne said he was “convinced” Russia does not want to use natural gas as a weapon in its conflict with Ukraine.
TotalEnergies' operations in Russia, which include stakes in liquefied natural gas plants, have not been affected by the conflict so far, he said.
While Britain only sources 6 per cent of crude oil and 5 per cent of its gas from Russia, Europe relies on the country for about 40 per cent of its natural gas.
Most comes through pipelines including Yamal-Europe, which crosses Belarus and Poland to Germany, Nord Stream 1, which goes directly to Germany, and via Ukraine.
Earlier this week, German Chancellor Olaf Scholz put certification plans for the Nord Stream 2 gas pipeline from Russia to Germany — which is designed to double the amount of gas flowing from Russia to Germany, bypassing Ukraine — on hold.
Europe's gas markets are linked by a network of pipelines. Most countries have cut reliance on Russian gas over the years and there are also more supply routes that bypass Ukraine.
By last year, Ukraine was a transit corridor largely for gas going into Slovakia, from where it continued to Austria and Italy.
While there are no sanctions yet on Russian energy trade, sanctions have been threatened against Nord Stream 2. However, after Germany suspension of the project's certification process on Tuesday, the European Commission said current European gas supply would not be affected since the pipeline is not operating.
The knock-on effect on consumers will be hard, with UK households, for example, already grappling with higher energy and fuel bills after demand surged after the easing of Covid-19 restrictions, with the cost-of-living crisis set to worsen from April, when energy bills rise by 54 per cent and higher taxation starts.
Simon Williams from the RAC, a motoring organisation, said the increase in the price of oil will inevitably lead to wholesale fuel prices going up, which in turn will in turn “push record pump prices even higher”.
With oil expected to rise further, a price of $110 a barrel could result in the average price of petrol in the UK hitting £1.55 a litre, taking the cost of a full tank to £85.
Commodity traders are watching the country’s vast network of infrastructure closely, as it is key to supplying gas, crops and steel to Europe and beyond.
Moscow has confirmed it is focusing on military infrastructure across Ukraine, with prices of oil, crops, metals and European energy surging as the West vows to impose further sanctions.
Any disruption poses risks of shortages in Europe, and with commodity prices already around record highs, war in Ukraine will add to inflationary pressures across the global economy.
Russia, together with Ukraine, accounts for 29 per cent of global wheat exports, 80 per cent of sunoil exports and 19 per cent of maize exports.
“A war will trigger a food and energy crisis. Emerging-market countries, especially Turkey, Egypt and Lebanon, are highly dependent on wheat produced in Russia and Ukraine,” said Dan Wang, chief economist at Hang Seng Bank in Shanghai.
“These countries are fighting high inflation. A war will deepen the crisis. The poor are the biggest victims. But the war has limited impact on global trade, because apart from oil and natural gas, Russia doesn't have supply chains that can impact the world.”
Heavy sanctions to help contain the crisis would hit both Russia and the global economy hard, said Takahide Kiuchi, executive economist at the Nomura Research Institute in Tokyo,
“They would cause spiking oil prices, plunging stock prices and price-rises in safer assets,” he warned.
Mr Kiuchi said this would derail the global economic recovery from the coronavirus-induced slump.
Stock markets plunged into the red in early trading on Thursday, with the FTSE100 falling 2.7 per cent in London and European stocks falling by about 3 per cent as investors baulked at the prospect of the biggest conflict in Europe since the Second World War.
Meanwhile, the dollar jumped and gold rose as much as 3.4 per cent to $1,973 an ounce — the highest since September 2020 — as investors sought out safe-haven assets.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said investors are expected to seek out more defensive positions to shelter from market turbulence.
“However, investors also need to keep their nerve and have an eye on the longer horizon,” she said.
“The shock of conflict is devastating, but history does point to relatively short-lived volatility on financial markets. Investors should try to look beyond these events and focus on their long-term goals.”
When it comes to gas, some countries have alternative supply options. Germany, the biggest consumer of Russian gas, could chose to import from Britain, Denmark, Norway and the Netherlands via pipelines.
But Norway, Europe's second largest supplier, is delivering natural gas at maximum capacity and cannot replace any missing supplies from Russia, its prime minister has said.
Depending on how severe the situation becomes, several nations have options to fill the gap with power imports via interconnectors from neighbours, or increased power generation from nuclear, renewables, hydropower or even coal.
But nuclear availability is declining in Belgium, Britain, France and Germany as plants age, are decommissioned or phased out, and power cuts have become frequent.
Under pressure to meet climate targets, several EU countries have shut down old coal-fired power plants or are not building new ones.
Russia has said it will continue to deliver uninterrupted natural gas supplies to world markets, in a letter to an energy conference in Doha.
“We do not think it likely that Russia would shut off gas supplies to Europe. Russia delivered gas to Europe through the Crimea crisis in 2014/15 after the imposition of selected sanctions in response, and at the height of the cold war,” Barclays analysts said.