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    From the Editor: Markets face geopolitical ripples [Gas in Transition]


The tense situation between Ukraine and Russia has stirred volatility in the gas market, while events in Kazakhstan highlight the risks when fuel and energy prices go too high. [Gas in Transition, Volume 2, Issue 1]

by: Joseph Murphy

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Natural Gas & LNG News, Premium, Editorial, Gas In Transition Articles, Vol 2, Issue 1, Political

From the Editor: Markets face geopolitical ripples [Gas in Transition]

There is now cautious optimism in Europe that there is enough gas still in stock to last the winter, following the arrival of warmer weather and extra LNG cargoes. This is in stark contrast to the sentiment before Christmas.

On December 21, the front-month contract at the Dutch TTF hub spiked to nearly €180/MWh, amid continuing constraints on Russian supply and lower temperatures. Today the contract is trading at less than half that level, although the price is still many times higher than in previous winters.

Europe is not out of the woods yet, however. And besides the risk of a cold spell, another factor causing no small amount of unease is the threat of war between Russia and Ukraine. Russia is understood to have amassed a force of more than 100,000 troops at the Ukrainian border, and Kyiv says Moscow is preparing to invade. Talks between Russian, US and NATO officials have so far failed to de-escalate tensions.

Russia certainly does not want a war with Ukraine. In contrast to the euphoria that followed Moscow’s annexation of Crimea in early 2014, polls show the Russian populace is now mostly disinterested in the Kremlin’s international ambitions. Instead, their attention is on stagnating living standards and a sluggish economy at home. An invasion would also be too costly financially and in Russian lives, and Moscow would also have to invest heavily in any captured territory, as it did in Crimea.

At the same time, Russia needs there to be a credible threat of invasion to get the concessions it desires. Its demands include no further NATO expansion, including to Ukraine and Georgia but also Finland and Sweden, and a commitment that there will be no NATO deployments in former Soviet Union states, or in countries that joined the military alliance after 1997, such as Poland and the Baltic States. It also wants a ban on NATO missiles within striking distance of Moscow, and special status for the Russian-backed separatist states in east Ukraine.

This is quite a wish list, and the Kremlin will be willing to give ground on some issues. But its red line is no NATO encroachment into Ukraine, which it wants to keep as a buffer zone. And so far the US has said that denying Ukraine membership of NATO is off the table, and so negotiations are at a standstill.

While Russia is threatening Ukraine with troops, the US is threatening Russia with severe economic sanctions if there is an incursion into Ukraine. With neither side apparently willing to give much ground, it seems unlikely that there will be a resolution any time soon. In the meantime, the tense situation will continue stirring market volatility.

When prices go too high

Over in the oil market, unrest in Kazakhstan has contributed to an upward movement in prices this month. The mass protest and rioting the country experienced for just over a week has come amid growing dissatisfaction with the government and economic inequality. But the trigger was a hike in the price of liquefied petroleum gas (LPG), commonly used in vehicle transport in Kazakhstan, sparking the worst unrest the country has experienced since its independence in 1991. Order has now been restored, with the assistance of Russian paratroopers that were called in by Kazakh president Kassym-Jomart Tokayev.

Events in Kazakhstan have had very little direct impact on the natural gas market. Yet they highlight the difficulties that countries face in phasing out various fuel and energy subsidies without triggering mass uprisings.

Kazakhstan has been struggling for years to end fuel subsidies and introduce greater market liberalisation. These subsidies drain the budget, taking funding away from other priorities such as roads, schools and healthcare, and create market distortions. At times Kazakhstan has endured fuel shortages when international fuel prices are high, for example, because traders have an incentive to send more domestic supply to other more lucrative markets such as Russia.

While the unrest this month had nothing to do with natural gas, Kazakhstan and many other economies across the world similarly subsidise that fuel, and could face the same risk in ending this support.

Even for economies with liberalised fuel and energy prices there is a lesson to learn. The current supply crunch means these prices are high, fuelling public discontent. Some may have to reintroduce such subsidies to protect vulnerable consumers and the economy at large from increased energy costs. Another option is to invest in more supply, but when it comes to hydrocarbons, governments in some developed nations may be reluctant to do this through fear of accusations of backtracking on climate commitments. Faced with the prospect of election losses, mass protests or even unrest, though, they may view that as the lesser of two evils.