Russia-Ukraine Gas Deal – 26% Drop in Irish Wholesale Gas Prices in 2014

Irish wholesale gas prices down 26% since beginning of 2014
Russia-Ukraine deal resulting in drop in gas prices due to reduced risk premium
Gas inventories across major European hubs above 90% fullness
Friday, 31st October 2014: The natural gas supply deal reached between Russia and Ukraine has resulted in significant downward pressure on wholesale gas prices being traded today, according to Irish energy supplier Naturgy. When markets closed today, wholesale market contracts for next-day delivery were down 26% since the start of year, trading at 49.1p (down 2% compared to yesterday’s closing price).

Meanwhile, prices for within-day gas delivery are down 10% since markets opened today and contracts for delivery during the first quarter of 2015 are down 2%.

The deal, which will see Russia resume natural gas supplies into Ukraine during the winter period (up until March 2015) was brokered late on Thursday during tripartite talks between Russia, Ukraine and the EU. The deal means that Russian gas supplies delivered into other European countries via Ukraine are now more secure which is of significant importance given Russia provides approximately a third of EU’s gas demand, with half of that coming via Ukraine.

Joanne Daly, Senior Energy Analyst at Naturgy states: “Since Russia stopped supplying Ukraine, the markets had factored a significant risk premium into wholesale gas prices at all major European gas hubs, including the UK wholesale gas market – which is the major source of gas supply into Ireland. With a deal now agreed between Russia and Ukraine, concern over winter supply is greatly reduced and we’re seeing a drop in prices in line with this with all contracts traded so far today falling in value.”

Ms Daly, notes that the removal of this risk premium means that the market is now almost entirely bearish with downward pressure on prices prevailing. The supply outlook is extremely positive, boosted by increased shipments of LNG (liquefied natural gas) and gas storage levels now above 90% fullness in the UK and across major European hubs.

“Over the coming winter, demand levels are broadly expected to be similar to last winter, which was below average,” says Ms Daly. “So, while there is always a risk of unplanned outages at key terminals, the general strong health of the system would minimise any impact on prices. With all this in mind it appears it would take a significant event to drive prices up for a prolonged period of time.”