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Ukrainian Invasion of Kursk Creating Gas Price Volatility, BMI Warns

by Andreas Exarheas

|

Rigzone Staff

| Wednesday, August 14, 2024 | 10:25 AM EST

'Energy markets reacted quite strongly in response to Ukraine's incursion into Kursk', BMI analysts said.

Image by IherPhoto via iStock

In a BMI report sent to Rigzone on Wednesday by the Fitch Group, analysts at BMI said the Ukrainian invasion of Kursk is creating gas price volatility.

“Energy markets reacted quite strongly in response to Ukraine’s incursion into Kursk, with the European gas benchmark, the Dutch TTF Front Month Contract, increasing from EUR 35.65 ($39.34)/MWh on August 5 to over EUR 40 ($44.14)/MWh on August 8,” the BMI analysts noted in the report.

“The potential access to the Sudzha gas transit link led to the risk of flows being disrupted, should Ukraine have sought to impede Russian revenue streams,” they added.

“Although the Sudzha gas transit corridor contributes relatively minor amounts to Russia’s overall hydrocarbon revenues, it nonetheless plays a significant role in the regional energy transit network (five percent of the EU’s gas consumption), and thus creates uncertainty for overall European gas supply,” they continued.

In the report, the BMI analysts highlighted that, on August 6, Ukrainian forces launched a cross-border incursion from Sumy Oblast, Ukraine, into Kursk Oblast, Russia.

“This operation represents a strategic shift from the defensive posture Ukraine had been forced into due to interruptions in aid flow, which allowed Russia to maintain the initiative since November 2023,” the analysts stated in the report.

“Unlike previous limited and disorganized cross-border raids by pro-Ukrainian forces, this larger-scale incursion has significantly impacted Russian military and public perceptions,” they said.

The specifics of territorial control in Kursk Oblast remain unclear due to the ongoing volatile situation, according to the analysts.

“Ukrainian forces have focused their efforts on the small town of Sudzha, with a population of roughly 5,000. Geolocated footage from August 11 confirmed activity in the western and southern parts of Sudzha and nearby Guevo,” the analysts said.

“Central and eastern Sudzha remain contested, with the frontlines shifting constantly. Additionally, there are unverified reports of Ukrainian advances westward and northwestward into Kursk Oblast, including areas like Snagost, Kremyanoye, and near Olgovka,” they added.

“The impact and developments of this incursion continue to unfold, marking a significant escalation in the conflict,” the analysts warned.

The analysts highlighted in the report that, as of August 13, TTF front month natural gas prices had “cooled following the initial spike after the Ukrainian offensive started”. They projected in the report that “prices are likely to continue to cool … due to several factors”.

“Firstly, there is currently no indication that Ukraine seeks to disrupt the flow of Russian gas from the Sudzha link across Ukraine, especially given that Ukraine also receives transit fees, easing some of the supply risk concerns that had previously driven up the price,” the analysts said in the report.

“Furthermore, Europe will be entering the heating season with substantial gas inventories (forecast to reach 90 percent in late-August), and lastly, flows from Norway, the EU’s top pipeline gas supplier, remain steady,” they added.

“As such, we continue to forecast Dutch TTF prices to average EUR 30 ($33.09)/MWh in 2024. Should there be any indication that gas flows from Russia are set to be disrupted, we will likely revise our forecast upwards,” they continued.

In a Standard Chartered report sent to Rigzone late Tuesday by Standard Chartered Bank Commodities Research Head Paul Horsnell, analysts at the bank, including Horsnell, highlighted that European gas prices had “surged over the past week following the movement of Ukrainian forces into Russia’s Kursk oblast”.

“Market concern centers on the Sudzha measuring station, the point after which Russian gas enters the Ukrainian pipeline system and transits to users primarily in Hungary, Slovakia, and Austria,” the analysts highlighted in the report.

“The Sudzha metering station is roughly 200 meters from the Russia-Ukraine border and about 6km from the town of Sudzha. The transit flow is usually around 40 million cubic meters per day (MMcmpd) … so far there have been no interruptions, with transit of 42 MMcmpd on 13 August,” they added.

The main danger is damage to the infrastructure, the Standard Chartered analysts noted in the report, adding that “some satellite images circulating on social media appear to show the destruction of the administrative building at the Sudzha station and damage to one of the four metering units”.

“While the scale of damage is difficult to verify, we think those images have further increased nervousness among gas traders,” the analysts said in the report.

The flow through Sudzha is likely to cease at the end of 2024 in any eventuality, the Standard Chartered analysts warned in the report.

“In June Ukraine announced that it will not seek any extension of the transit deal with Russia when it expires in December,” the analysts said.

“The market is therefore reacting to the potential loss of just four and a half months of flows, which is roughly 5.8 billion cubic meters. However, we do not think either combatant wishes to stop the flow before the agreement runs out,” they added.

“If Ukraine wished to stop transit through its territory it did not need control over Sudzha, and Russia appears to see the continuation of flows to Hungary and Slovakia as a source of foreign policy leverage,” they continued.