European Gas Surged After the Sanctions on Russia

After another round of sanctions imposed on Russia over the weekend, European natural gas prices fueled fears of energy shortages. On Monday, futures rose as much as 36% after Western nations agreed to impose harsher sanctions after the initial ones failed to persuade President Vladimir Putin to withdraw his forces from Ukraine. While they do not apply to energy, the new sanctions may force buyers, financiers, and shippers to avoid Russian flows. At the same time, Moscow may retaliate by cutting supplies.

Europe imports roughly one-third of its gas from Russia, with many shipments passing through pipelines across Ukraine.

Any disruption could cause Europe to freeze in the winter and reduce the continent’s electricity production; this would cause energy-intensive industries ranging from metal smelters to fertilizer manufacturers to slow or shut down production.

The additional sanctions may provoke retaliation from Russia, potentially reducing energy imports to Western Europe.

According to Shearing, the sanctions will “significantly reduce” Russia’s central bank’s ability to sell foreign assets to support the ruble. It will also limit Russia’s ability to service forex-denominated liabilities.

However, the US has stated that sanctions could still impose. Sanctions against energy are certainly on the table.

European buyers are looking to wean themselves off Russian gas by constructing LNG terminals. Germany has halted approvals for the contentious Nord Stream 2 pipeline. However, new projects will take years to complete. For the time being, the continent is still heavily reliant on Moscow for energy, particularly gas, and any disruption inflows could slow the replenishment of depleted storage in the summer, resulting in another supply crisis next year.

Germany’s decision to build two LNG terminals reinforces the view that as long as Putin controls Russia, Nord Stream 2 will be doomed.