Although it has not resulted in a full-blown rally, the rally in gas that began last week has continued. The reason for this is another geopolitical flare-up, but this time the Middle East is not causing the problems.
The latter, however, could make the situation even worse if the fears come true and Iran ultimately attacks Israel either directly or through its ally Hezbollah or – worse still – paralyzes the Strait of Hormuz.
The recent price increase is due to the Russian-Ukrainian conflict, in particular the Ukrainian attack on the Kursk region, as well as concerns about disruptions in the operation of the GIS Sudzha.
To explain why this is important: this is the last transit channel for Russian gas to Europe through the Ukrainian gas transportation system. Although not critical, the stakes are significant.
According to the Wall Street Journal, the Sudzha gas metering station covers three to five percent of Europe’s gas supply, with the majority going to Central European countries (Austria, Slovakia and Hungary).
But how realistic are these concerns?
That’s a tricky question. If the goal was to stop the flow of gas, you could just close a valve. And the contract for this transit expires this year, so we can hope for the best.
On the other hand, Russia could destroy the pipeline itself to regain lost territory. At this point, anything is possible, so the European natural gas market remains in risk mode.
As for the question of whether Russia could divert gas via Turkey in the worst case scenario, this is only possible for a part of the amount and would require the creation of a Turkish gas hub.
The good news is that, as mentioned above, because of the small fluctuations above $1,000 per cubic meter, even if the flow is interrupted, there are unlikely to be any significant changes.
Another problem is that some countries, especially Hungary and Slovakia (but not Germany), may face economic problems due to the disruption of natural gas supplies, which would ultimately affect the EUR/USD currency pair.
What awaits us on the gas market?
If the situation with the Sudzha gas metering station miraculously resolves itself without its destruction, prices could return to normal levels. However, this scenario seems less and less likely every day.
Overall, volatility seems to be returning to energy markets. The question now is to what extent it will impact and whether it will affect overall inflation in the eurozone and, subsequently, the ECB’s plans to cut interest rates.
Disclaimer: The views expressed in this article are those of the author and may not reflect the views of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided, however neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not a solicitation for the exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article assume no responsibility for any loss and/or damage arising from the use of this publication.
