Why is natural gas so volatile lately?

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Natural gas has experienced more than its share of volatility lately, much of which is directly tied to the conflict between Russia and Ukraine. Almost 40% of the natural gas exported to the European Union comes from Russian pipelines, a quarter of which must flow through Ukraine. Of that, almost half goes to Germany—the biggest economy in the EU. So it’s little wonder that since February’s invasion, natural gas prices have hit quite a few volatile patches, and considering the geopolitics that have since unfolded between the EU and Russia, as well as the US, it’s likely that we’ll see more volatility in the near future. Let’s take a closer look at the role natural gas plays in the Russia/Ukraine conflict and how its trading price may be affected going forward.

 

Natural Gas Needed By Both Sides

Although several other commodities have been affected by the ongoing conflict, the reason natural gas stands out comes down to its importance on both sides in terms of supply and demand. “What’s happening is that the Russians are making a lot of money with it,” commented Georg Zachmann, a senior fellow at Brussels-based economic think tank Bruegel. “They are making hundreds of millions of dollars every day with the gas they are selling to the Germans and the Europeans. The Europeans, on the other hand, are highly dependent on Russian gas for filling their storages.” According to the IEA, in 2021 EU countries imported 155 billion cubic meters of natural gas from Russia, forming nearly 45% of their overall imports and 40% of their total gas consumption.

The Price of Taking Action

Taking action against Russia comes with its costs. Just after the conflict started on 22nd February, Germany stopped its participation in the Nord Stream 2, a pipeline which connects Russia to Germany via the Baltic Sea. At the same time, the EU revealed its policy to lessen demand for Russian gas by two-thirds and ultimately make Europe independent of Russian fossil fuels by 2030—a move that added to a bevy of economic sanctions leveraged by the US against Russian financial institutions.

As a result, natural gas prices shot up nearly 75% over the next two months.
Ukraine also added fuel to the fire when, in mid-May, its state-owned operator Gas TSO blocked Russian natural gas from entering Europe through its Sokhranivka entry point, sending trading prices up more than 6.4%. Immediately after, Gas TSO also halted Russian gas at its Novopskov border compressor station, which usually accommodates nearly a third of gas to Europe. Consequently, natural gas prices increased by 10% in a week between 10th and 18th May.

What’s Next For Natural Gas?

If the past four months are anything to go by, plenty of volatility is on the horizon. In mid-April, Russian energy company Gazprom threatened to cut off further natural gas supplies to Europe, namely Bulgaria and Poland. Although they haven’t made good on the threat yet, anxiety is running high, as fears of an energy blockade could cause “catastrophic pricing” come winter, according to Bill Perkins, CEO and head trader at Skylar Capital Management. “We’re in a hot-box button-panic mode,” he said, “If Russia shuts off the gas and oil, Europe is going to be scrambling this winter to maintain heating, and just maintain their economies.” While the US and the UK have already mobilized to ban Russian energy, key European countries including Germany are still hesitant, although Germany has stated the possibility of weaning itself from Russian oil by the end of 2022.

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