War Risks and Lower Prices Keep Traders Away From Ukraine’s Gas Storage

War risks and lower differentials between summer and winter prices are keeping Europe’s natural gas traders away from the underused underground gas storage sites in Ukraine.

Last year, many traders were willing to risk and ignore the potential damage to Ukrainian storage sites as natural gas prices in Europe were much higher and the discount of prices in the summer months to the winter-month prices was wide enough to justify storing the fuel in a war zone.

The commodity can be bought anywhere and sent to Ukraine via reverse flows in pipelines from Hungary, Slovakia, and Poland.

During the summer of 2023, despite the risks of the Russian invasion of Ukraine and the possibility of a direct hit or a deliberate attack on Ukrainian gas infrastructure, traders believed that the risk was worth taking as costs for storage were cheaper and capacity was easily available.

For traders waiting for higher gas prices in Europe in the winter, Ukraine was a good bet for storage sites, especially because EU storage was filling fast during the summer and was very close to hitting – well in advance – the 90% full target by November 1.

But the EU storage sites can only hold roughly less than a third of the typical consumption volumes, and traders were turning to storage in Ukraine.

This summer, war risks have surged after Russia targeted in the spring of 2024 Ukrainian energy infrastructure, including natural gas storage sites. At the end of April, the head of Ukraine’s state energy company appealed to the European Union to help protect gas storage sites from Russian strikes.

The heightened risk of an attack on Ukrainian storage sites is no longer worth the cost as the premium of winter prices over summer prices is now some $5.46 (5 euros) per megawatt-hour (MWh), significantly down compared to a $21.84 (20 euros) premium per MWh at this time last year, the Financial Times reports, citing data from price reporting agency Argus.

“Price differentials are not attractive enough to justify the risk of injecting gas into a war zone”, Marco Saalfrank, Head of Continental Europe Merchant Trading at Axpo, told FT.

By Tsvetana Paraskova for Oilprice.com

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