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Russian Roulette with Ukraine’s Gas Supply

June 17, 2014 | About:

Ukraine Prepares for the Worst as Gas Supplies are Cut Off!

In a bold move, Russia decided to up the stakes and cut off Ukraine’s gas supply. This decision is bound to have immediate effects on the already destabilised Ukrainian economy. Should Russia continue to shut off the supply, European nations will start feeling the pinch in the coming months. At the heart of the dispute is Ukraine's reluctance to pay the higher prices being demanded by Russia.

The government in Kiev is battling against a well-organised and obdurate insurgency in the eastern regions of the country. The ongoing tensions have polarised society between those favouring cessation, and those seeking a strong and united Ukraine. The country has been racked by economic turmoil, political upheaval and violence in the weeks and months since the pro-Russian leader Yanukovich was ousted.

Winter Energy Needs Could Tip the Scales

The short-term effects of this latest debacle will likely not impact heavily on European energy supplies. However, as the winter approaches it may prove to be devastating. European stockpiles will likely diminish and lead to a spike in international gas prices which could have far-reaching implications on the global economy.

The Eurozone economy is largely intertwined with that of Russia vis-a-vis its energy supply. The gas company at the centre of this highly contentious issue, Gazprom, made public its decision to halt gas flows from Russia to the Ukraine, owing to a shortfall in the monies owing to the company. It is estimated that approximately 15% of all natural gas supplies that are consumed in Europe come through Ukrainian pipelines.

The Russian decision to cut supplies of natural gas may result in a long-term tit-for-tat escalation between the two nations. The natural gas company in the Ukraine alluded to being able to weather the storm until the end of the year, if need be. According to GSE (Gas Storage Europe), Ukraine’s gas supplies are at 42%. Ukraine’s consumption in the last several months was 13.5 billion cubic metres, and some 18.5 billion cubic metres are required for the winter. The Russians have decided to treat the issue as business as usual, with Ukraine getting precisely what it pays for.

The Russian Prime Minister and Ukrainian Prime Minister are at odds regarding the payment. The Ukrainians refuse to pay what they consider extortionate prices for gas from Russia. They also fear that the money that is transferred to Russia will be used to fund the pro-Russian insurgents presently wreaking havoc on their country. The Russians deny these allegations. To further punish the Ukrainians, the Russians have stopped importing Ukrainian potatoes, citing contamination as their reason. This is bound to place further pressure on the already ailing Ukrainian economy.

Pro-Russian Separatists Reject Calls for a Truce

When the newly elected Ukrainian Prime Minister Poroshenko assumed office, he immediately called for a ceasefire between pro-Russian separatists and government forces. His calls were rejected and vicious fighting flared up in the eastern Ukraine. While the precise number cannot be ascertained with accuracy, the Ukraine military estimates that they could be upwards of 20,000 insurgents operating in the country. The Donetsk region remains a hotbed of unrest, with the rebels assuming control of government buildings, installations, banks and tax authorities.

On Saturday, 14 June, pro-Russian rebels took out a Ukrainian transport plane, resulting in the deaths of 49 people. This was met by violent attacks on the Russian embassy in the capital of Ukraine. Following Russia's annexation of Crimea as an independent federal state, the gas price increased by 81%. The price that the Ukrainians are now expected to pay per thousand cubic metres of gas is $485.50. The Ukrainians refuse to pay these extortionate costs, and even after the compromise price of $385 was reached, problems remain. The Ukrainians feel that any decisions they take that arouse the ire of Russia will result in higher gas prices.

Ukrainians face a dilemma since they rely on Russian gas supply to service their country's needs. Even if Ukraine purchases gas from other countries, there will still be a shortfall. According to the Russian gas giant, Gazprom, the Ukraine owes $4.5 billion for gas supplies. The Ukrainians have agreed to pay $326 per 1,000 cubic metres of gas. This issue is particularly important since Slovakia receives an estimated 80% of its natural gas via the Ukraine. Bulgaria receives as much as 90% of its gas via the Ukrainian pipelines. The Russians have made it clear that only Ukrainian supply will be limited – not the supply that Europe receives. Russia’s history with matters like this has resulted in countries like Slovakia and Bulgaria losing their supply. Russian gas supply to the Nordstream pipeline will continue, and supplies to Europe can be rerouted via the Baltic Sea.

Projections in Light of the Gas Shutoff

Banc De Binary analysts have been pouring over commodities prices, noting the peaks and troughs of natural gas on Monday the 16th June. Natural gas hit its low point of 4.6725 at 2PM, and rallied as high as 4.776 at 4:45 PM. By the close of the day, the price had dropped to 4.7075 at 9PM. Based on the current numbers, natural gas is definitely bullish and is likely to see traders streaming in to profit from the lower price. A few days earlier, on Friday the 13th June, the gas price formed a shooting star. The pullback is likely not a trend and will in all likelihood reverse. The 4.50 level is seen as the critical level, after which point natural gas futures will be sold and the market will take on a definite bearish tone.

About the author:

Orit Nathan Mahalal is Banc De Binary’s Head of Content, an accomplished writer and social media expert. At Banc De Binary, Orit heads a team of copywriters who, under her direction, create content for all aspects of the business, internal and external. Orit’s key role is to ensure that only top quality, superior copy enters the channels and that Banc De Binary stays at the forefront of the binary options industry.

Visit orit's Website

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Batbeer2 premium member - 3 years ago

>> European nations will start feeling the pinch in the coming months.

It seems you are misinformed.

1) First off, most Russians are Europeans.

2) I happen to live in a EU country that exports gas. That's one nation that is not going to "feel the pinch."

3) The gas that is passed on to the EU (not to be confused with the continent) through the Ukraine has not been shut down. Even in the sixties (with Chroesjtsjov banging the desk at the UN) the gas pipelines from Russia to the west remained open. Chroesjtsjov was a Ukranian. He previously worked as a pipelayer.

If there's something worth noting here for investors it may be that the current uncertainty regarding the supply of (cheap) natgas to the EU is good for the likes of Phillips66 (and Boardwalk). Major refeneries are investing in the US (as opposed to the EU). The US is where you find cheap feedstock as well as political stability.

Andrev - 3 years ago    Report SPAM

Also worth mentioning that:

- Ukraine hasn't paid a cent for the supplied gas since November 2013..

- Germany is getting russian gas at avg price of around $380, some European countries at much higher price levels, Chinese just signed decade long contract at above $350, so not clear why Russians should keep subsidizing Ukrainian economy at $265 on which Kiev insists..

Jjeans111 - 3 years ago    Report SPAM

Russia needs to stop all of this already and leave Ukraine alone. Hopefully the recent sanctions imposed on them will influence them to back off. If not, it is probably very bad news for the Russian economy.

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