Consumers brace for higher energy bills as Russia attacks Ukraine

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An already tight oil and gas market is feeling the brunt of the conflict, which threatens to disrupt supplies to Europe.

Russia’s military attack on Ukraine has spooked global stock markets and triggered a sharp spike in oil and gas prices at a time when many governments are already struggling with high inflation.

Brent crude, an important benchmark price, rose above $100 a barrel for the first time since 2014, as reports emerged that Russian troops entered Ukraine and explosions were heard in various Ukrainian towns.

Brent was trading at around $70 in early December.

Natural gas is also on fire. Benchmark Dutch futures rose sharply to $140 per megawatt-hour on Thursday before falling. Dutch gas futures were trading at around $87 earlier this week.

A sharp spike in prices will add to the worries of consumers – especially in Europe – as they were already paying high energy bills.

Europe depends on Russia to cover a third of its gas needs. However, there is no indication so far that Moscow has cut gas supplies to its European consumers, with Austrian oil giant OMV saying it usually sources gas from Russia.

Russia uses a network of gas pipelines to export gas to Europe. One of the roads crosses Ukraine and it is feared that it could be damaged if the fighting intensifies.

The United States, United Kingdom and European Union have imposed a new round of economic and financial sanctions on Russia, mainly targeting government officials and companies close to the state.

Sanctions have so far spared Russian energy infrastructure, with the exception of the Nord Stream 2 gas pipeline project which has been suspended by the German government.

The $11 billion Nord Stream 2 pipeline was completed last year as a new route, which bypassed Ukraine, to supply Russian gas to the German market via the Baltic Sea. But the pipeline, which the United States opposes, has not yet been used to make deliveries.

Gazprom – Russia’s state oil and gas monopoly – derives a significant share of its revenue from European consumers and any interruption in supply will reduce its financial contribution to official coffers.

Even if supplies from Russia, the world’s largest gas exporter, are not disrupted, the fear of a shortage may be enough to shake the markets.

Russia, also the world’s third-largest oil producer, supplies around 4.5 million barrels per day to the world market of around 100 million barrels per day.

Moscow’s contribution to the oil market is significant because additional supplies are hard to come by. Oil and gas companies have reduced investment in new projects due to growing environmental concerns.

This means that even a slight interruption in supply can drive up the fuel prices consumers pay at retail outlets. Brent crude is expected to hit $125 a barrel over the next few months, according to JPMorgan.

This spike in energy prices is a far cry from the glut the market experienced in 2020 when, at the height of the pandemic, oil prices crashed and producers struggled to find buyers for get rid of extra supplies.

Energy prices started to climb again last year as businesses opened and travel continued.

The issue of a sharp rise in energy prices is of particular concern for European consumers, who experienced unusually cold summers last year.

As people switched to using heaters, gas utilities drew more gas from their backup storage – kept in large underground tanks.

According to the latest figures published on the website of GIE, an association of European gas utilities which tracks the data, the tanks were filled up to 30% of their capacity.

Gas prices in Europe have jumped more than 400% in the past year as demand has increased as lockdown restrictions have been eased and factories have opened.

The United States has tried in recent months to reduce Europe’s dependence on Russian gas. He has tried to woo major exporters of liquefied natural gas – the superchilled form of gas – to increase exports to the continent.

But it won’t be easy.

Qatari Energy Minister Saad al-Kaabi told an energy conference this week that no country has the reserve volumes to replace Russian gas exports to Europe.

Source: World TRT

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