LONDON: British wholesale natural gas prices rose up to 5 percent on Monday as Russia cut supplies to Ukraine over a gas pricing and debt dispute, with traders saying healthy alternative supplies and low summer demand prevented steeper increases.
Russian natural gas exporter Gazprom has halted deliveries to Ukraine, marking the third such disruption over payments since 2006.
Ukraine's energy minister said Russia had cut off all gas supplies to Kiev but he guaranteed reliable flows would continue to Russia's European clients who get imports through pipelines via Ukraine.
The British day-ahead gas contract, a benchmark for European markets, has risen over 5 percent since last Friday's close and climbed as high as 44.50 pence per therm early on Monday.
"I think the market had expected a compromise to be found over the weekend, so when it became clear that the deadline had passed without a deal and then supplies were cut, prices reacted with an uptick," one trader said.
Despite the cut, prices began to ease back after Monday's early trading, with traders pointing to healthy alternative supplies as well as weak demand.
"Given that we are in the summer and the level of gas storage in Europe remains high after a mild winter, the immediate threat to gas supplies is not going to be as significant as they were in 2006 and 2009 when the disruptions happened in the winter," said Michael Bradshaw, Professor of Global Energy at Warwick Business School.
"But if this drags on for longer it could have a significant effect on gas supplies and prices this winter. The market will be jittery," he added.
Gas prices for delivery next winter, when a cut would hit Europe most as demand is highest during the heating season, rose as high as 63.20 pence a therm, up from under 60 pence in early June.
Prior to Monday's increases, gas prices had spent most of the year in decline after a mild winter and spring left storage unusually full, with healthy pipeline supplies and shipped liquefied natural gas (LNG) imports.
Europe meets around a third of its gas demand through imports from Russia, and almost half of this usually flows through Ukraine. The rest is sent through alternative routes such as the Nord Stream and Yamal Europe pipelines, which go to Germany, avoiding transit through Ukraine.
EU NOT IMPACTED YET
Despite the supply cut, gas system operators from the European Union said Russian gas continued to come in from Ukraine. Operators from Germany, Poland and Slovakia among others, said Russian flows via Ukraine were ongoing.
It was unclear whether Ukraine was sending gas to the EU out of its own storage facilities or whether a drop in Russian flows had not yet been registered at the EU border.
Ukraine has almost 14 billion cubic metres (bcm) of gas in underground storage, compared with its yearly demand of over 50 bcm, enough to meet its needs until December, the chief executive of state gas company Naftogaz said.
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