Luxembourgh Times

European energy prices jump on mounting tension over Ukraine

Benchmark European gas prices jumped as much as 14% to €88 a megawatt-hour

Ukrainian Military Forces examine military trucks shipped from Lithuania to Boryspil airport in Kyiv on February 13

Ukrainian Military Forces examine military trucks shipped from Lithuania to Boryspil airport in Kyiv on February 13 © Photo credit: AFP

Source: Bloomberg

European natural gas and electricity prices jumped more than 10% as tensions over Russia’s military build-up near Ukraine enter a potentially decisive week, with the US warning an invasion may be imminent.

National Security Advisor Jake Sullivan said on Friday that intelligence indicates Russia may attack its neighbour before the Beijing Olympics end in a week. Russia has repeatedly denied it plans to invade, while Ukraine’s foreign minister downplayed tensions over the weekend, saying there’s been no “pivotal change.”

An escalation risks worsening Europe’s energy crunch, potentially hitting supplies of gas and oil -- and raising the spectre of blackouts. Russia is Europe’s top source of natural gas, with about a third of its exports flowing through Ukrainian pipelines. And Europe’s storage facilities are already running low, with prices five times higher than normal for this time of year. The situation also threatens to spill over into other commodities.

Higher energy prices have boosted inflation across Europe, sparking a cost-of-living crisis that’s prompted several governments to step in to help cushion the blow of rising energy bills for consumers.

“The immediate focus is on the potential for a disruption in Russian energy supplies to Europe, which would be very difficult to deal with, and could create a true energy shortage even beyond the challenge that we’re already seeing,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. “But before that, Europe was already in an energy crisis.”

Benchmark European gas prices jumped as much as 14% to €88 a megawatt-hour, the highest for a most-active contract since January 31. German electricity for March surged 11% to €177 a megawatt-hour.

Brent crude pared gains after an initial increase above $96 (€85) a barrel. Coal futures in Europe rose 3.2%.

Other commodities

The tensions have also upended metals markets as traders brace for potential supply disruptions. Prices for nickel and aluminium both rose on the London Metal Exchange. Palladium also edged higher as Russia accounts for 40% of the supply of the metal used in catalytic converters.

Europe is already grappling with an energy crisis as Russia has been curbing gas flows since the summer, forcing utilities to rely on burning dirty coal to keep the lights on. The continent is also facing a slew of nuclear outages in France, its biggest atomic producer, with Electricite de France SA warning that output this year could fall to the lowest since 1990.

In the UK, the cost of goods and services is already at its highest in three decades and will top 7% when a cap on gas and electricity bills is lifted in April.

“We’re facing a cost-of-living crisis and energy is a big aspect of it,” said John Sinha, an activist for Campaign Against Climate Change, who was protesting against high energy bills in London over the weekend. “People are having to choose between eating and heating and fuel poverty is a major issue.”

The tensions are also stoking fears of disruptions to food supplies, as Russia and Ukraine account for a quarter of the global wheat trade and about a fifth of corn sales. Any interruption of those flows could further exacerbate grain shortages. Chicago wheat futures climbed as much as 2% to $8.20 (€7.25) a bushel, the highest in almost three weeks.

©2022 Bloomberg L.P.