Gas Prices Surge Amid Ukraine’s Incursion into Russia

Geopolitical tensions are on the rise, with the world now paying even more focus to the Russia-Ukraine War. Last week, Ukrainian forces initiated a surprise offensive, pushing into Russia's Kursk region. This incursion included the fighting in and around Sudzha, a key gas transit point, raising the specter of increased fighting around critical pipeline infrastructure. As a result, TTF gas prices have surged to their highest point this year, surpassing 40 EUR/MWh and pushing European supply fears to the forefront.

TTF prices began the year on a calm note, supported by record high storage inventory levels. Disruptions were minimal until May when Israel launched its offensive in Rafah. Prices initially dropped as the situation stabilized. However, since the onset of the Ukrainian offensive on August 6, TTF prices have surged by over 15%.

Prior to the start of hostilities, Russian gas moved into Ukraine through several transmission points. However, the start of Turkstream in January 2020 saw Russian flows largely re-directed and Ukrainian imports consolidated at Sokhranovka and Sudzha. Flows shifted again post 2022, with gas now moving through Sudzha alone. This makes Sudzha an important checkpoint for European supply, as nearly 40 MMcm of natural gas moves through there each day.

While flows through Sudzha have drastically declined, it remains a significant supply point for Europe. Before disruptions in historical trade flows, gas from Sudzha met nearly 10% of European demand. Although the continent has diversified its sources with increased LNG imports, this figure has now fallen to 3–5%, still a substantial supply share. LNG serves many parts of Europe, but the predominantly Western European LNG regasification terminals make it challenging to transport supply to Central and Eastern Europe. As a result, interruptions in Sudzha's flows disproportionately impact countries further east. The graphic below shows European consumption by country on the left-hand axis and Sudzha supply as a percent of total European supply on the right-hand axis.

With Gazprom’s Ukrainian transit contract set to expire at the end of the year and both sides seemingly unwilling to renegotiate, the loss of flows at Sudzha appears inevitable. In response, Europe will likely turn to global LNG markets to address any shortfall.

Since 2022, Europe has worked to expand its LNG regasification capacity, with over 12 terminals planned and several new terminals and Floating Storage and Regasification Units (FSRUs) already constructed. Germany inaugurated its first FSRU in 2022 and further increased capacity with another terminal at Brunsbüttel. Poland, Greece, and Ireland are pursuing similar expansions. The graphic below illustrates the rise in LNG imports to Europe and highlights the United States' emergence as a major trade partner.

Europe’s energy markets have experienced a relatively calm year, but this may be changing as geopolitical tensions escalate. While Sudzha is currently a focal point, it underscores the broader issue of supply insecurity across the continent. Even non-military events, such as the proliferation of data centers in the United States, could drive European prices higher. Although high storage levels may mitigate near-term shocks, the approaching winter presents uncertainties. Check back for future Insights as we continue to monitor these events.

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