In regards to sending Russian military forces into Ukraine, Vladimir Putin said on Thursday “I very much hope that I am not obliged to use this right,” Amid the intensifying crisis in the region Roubini Economics now puts the risk of a formal Russian military invasion of Ukraine at 50% and the probability of a meaningful gas disruption at 30%.
Its worth noting that Russia didn’t even suspend gas supplies during the depths of the Cold War and with Russia likely to face increased competition from new gas supplies in Europe and North America it is in their interest to keep gas supplies flowing. Using this logic a probability of 30% attached to supplies being completely cut off appears too high. Putin may see things differently though. “We sell gas in European countries which have around 30-35 percent of their gas balance covered by supplies from Russia. Can they stop buying Russian gas? In my opinion it is impossible,” Mr Putin said.
In the scenario that gas supplies to Europe are completely suspended analysis from Energy Aspects suggests that European gas prices could more than double if supplies were cut off for two months and Europe then had to attract LNG supplies to fill the gap. Gas prices rose to almost 62 pence per therm in March after Russia took over the Crimea before falling back to 48 pence per therm. Today gas prices are around 52 pence per therm.
Bear in mind that even if your country doesn’t import much in the way of gas from Russia (Spain and the UK), gas prices will still rise sharply as traders in the continents gas market worry about where supplies will come from. Indeed, competition for LNG will also have a knock-on effect on Asian gas buyers, consultants Nexant estimate that gas prices there could rise by almost 20%.
A more likely scenario is that Russia cuts gas supplies to Ukraine. Mr Putin warned the EU a week ago that Russia would turn off the tap to Ukraine if it didn’t pay its bills. Indeed Putin has now gone further saying that Moscow is ready to wait for one month to Ukraine to pay its gas debt. The deadline falling one week before Ukraine’s May 25 elections. Although this would indirectly cut off around 15% of Europe’s gas imports the impact on gas prices would be significantly less, not least because Europe is moving towards summer.