Ukraine invasion sparks energy price fears as LNG soars

In Ukraine flow-ons, Asian spot LNG prices jump by a quarter in a single day, potentially delivering a producers’ windfall.

Oil and gas prices are heating up amid Russia’s invasion of Ukraine.

Oil could soar beyond $US130 ($180) a barrel while Asian spot LNG prices have jumped by a quarter in a single day, potentially delivering a windfall for Australian gas producers, as fears of disruptions to Russian gas output stoked market concerns over a supply squeeze.

The price of Brent crude topped $US100 a barrel, its highest level since 2014, and was trading at $US102 as Russia’s invasion of Ukraine ignited panic over the region’s energy exports, a remarkable turnaround from less than two years ago when prices went sub zero during the height of the Covid-19 pandemic.

The shockwaves of Russia’s incursion could lead to a prolonged spike in prices well beyond $US130 a barrel, according to consultancy Rystad Energy.

“Prices could approach $US130 per barrel by June if the Ukrainian conflict disrupts Russian crude flows, but that estimate could soar higher if additional disruptions materialise,” said Louise Dickson, Rystad’s senior oil market analyst.

LNG prices are also on a tear, with North Asia LNG futures soaring 27 per cent overnight to trade at $US37 per million British thermal units, nearly 20 times the LNG price recorded in June 2020, and a jump sparked by a looming battle for precious cargoes of spot LNG.

Asian buyers will face increasing competition from European utilities for LNG from North America after European gas prices lifted 40 per cent overnight following Russia’s attack.

Disruptions in Europe could result in a clamour for gas supplies, according to Credit Suisse.

“In a scenario where material gas supply into Europe is disrupted, we could see a global scramble for gas that causes LNG prices in Asia to spike even further,” Credit Suisse analyst Saul Kavonic said.

“Australian LNG producers with uncontracted volumes or volumes linked to spot pricing could stand to see much greater revenue near term from any spike in spot LNG prices.

“Given limited relative storage and Europe’s … reliance on Russian gas supply, we expect gas prices to be most susceptible to any geopolitical escalation, but oil may also be impacted.”

Greater competition among LNG buyers could lead to a profit bounty for big producers in Australia, with the commodity already among the nation’s biggest export earners.

The frenzy among buyers to grab gas volumes could lead to hugely lucrative shipments by Australia‘s top LNG exporters such as Woodside Petroleum, the broker said.

“Woodside has emerged with the strongest upside exposure to any European gas crunch of companies in the region, with around 2m tonnes of LNG or 20-25 per cent of LNG production linked to European gas or spot LNG prices,” Mr Kavonic said.

“Should a more severe gas supply shortage in Europe develop amid rising geopolitical tensions, Woodside could see a multi-billion dollar windfall this year.”

Oil prices could keep rising to $US120 a barrel, Bernstein analysts said, but they could be capped given the potential for demand destruction and risks to global economic growth.

“While there remains an active debate about how supply and demand balances will play out for the rest of the year, it seems likely in the short-term oil prices will like move higher towards $US110-120/bbl (unless there is a dramatic de-escalation of tensions). But the cure for high prices is high prices, and the higher prices go, the greater the risks to global economic growth,” Bernstein analyst Neil Beveridge said.

Risks to a bull market for oil also remain.

“Firstly, a mass outbreak of Covid-19 in China could be under way and could trigger mass lockdowns over the coming months. Secondly, negotiations with Iran could result in early removal of sanctions with an addition of 1m barrels a day to the market. Thirdly, demand destruction is now a real risk given elevated energy prices which will start to squeeze consumers and could trigger a global economic slowdown.”