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Issue title:

The Ukraine War and the Gas Trade

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March was a completely crazy and sad month. In Russia's war against Ukraine, which began on 24 February, Russian brutality and aggressiveness increased, whilst Europe's discussions about further sanctions intensified. The question of an embargo on Russian gas and its consequences came to the fore. The German government in particular opposes such an embargo, the economic consequences of which could be devastating. Below the threshold of an embargo, considerations focus on the questions of whether and how quickly dependence on Russian natural gas can be reduced, and what needs to be done to achieve this. In addition, the Ukraine war is causing incredible price movements and massive distortions in the gas market. These distortions are stronger than those triggered by the price turbulence in the fourth quarter of last year. What is absurd is that the current physical supply situation did not give rise to the turbulence at all – it was in fact very stable. But there is great fear among many market participants that it might not remain that way.

I have tried to layer the coverage. The topic of the month deals with price movements, the consequences for the market and the question of the further consequences of an embargo.

The market interventions in the areas of storage and the LNG market, which are intended to stabilise the markets and secure supply in the coming winter, can be found under the headings of framework conditions and transport.

Of course, the war and its consequences for the energy industry dominated almost all the talks I had in March and all presentations I gave. A manager of an energy company described the situation as follows: We have already had an energy price crisis since autumn 2021; currently, there looms the threat of a supply crisis and then a utility crisis. I had already written in the last issue that the gas "market" could change entirely as a result of this development. Very clear shifts from market to state intervention are becoming visible, especially in the proposals of the EU Commission.

This issue was again a lot of "work in progress" because the current crisis situation brings permanent changes. On finishing the manuscript, I do not want to rule out the possibility that Russian gas will have stopped flowing by the time you are holding this issue in your hands.

TOPIC OF THE MONTH The Ukraine War and the Gas Trade

It was a dramatic March for gas trading and gas sales, characterised by fears that Russian gas flows would come to a standstill and/or that trading would collapse entirely due to the failure of major trading companies. The result was an extreme price spike and incredible intra-day volatility, especially in the first ten trading days of March. The price peak of 350.00 euros/MWh for the DayAhead on 7 March was in almost every daily newspaper. It was reached at 10:00 am. By the time of settlement, the price on THE VHP had fallen again to around 220 euros/MWh on that day. 

1.1 Gas supplies: Everything quite "normal"

The absurd thing about the situation is that fundamentally supply was much better in March before the start of the Ukraine war, as gas flows from Russia increased. Even via Mallnow, gas flowed again from east to west on some days (Figure 1). This was due to increased nominations from customers who have long-term contracts. According to all that is known, the contracts are usually indexed Month-Ahead. This meant that procurement under the contracts in March was cheaper than procurement on the spot markets. In the second half of the month, gas flows from Russia fell again, but again this was probably solely due to changes in nominations. So far, there is no sign of a restriction of deliveries by the Russian side. However, the announcement by Russian President Vladimir Putin on 23 March to accept only payments in roubles for gas deliveries from the end of March caused considerable unrest. The German Minister of Economic Affairs, Robert Habeck, described this as a clear breach of contract, as payment in US dollars or euros is agreed in the supply contracts. The consequences of the announcement were not yet known at the time of going to press...