Europe’s Gas Market Is Still Counting on Russian Supplies

Liquefied natural gas, or LNG, is Europe’s primary swing source of the fuel, and prices at Europe’s Dutch hub have been jittery. The benchmark jumped 13% Thursday as traders scrambled to assess the likely effect of the new Russian sanctions, before falling back slightly early Friday. German Economy Minister

Robert Habeck

said Thursday that the sanctions would cut out about 3% of the country’s Russian gas deliveries, which he said could be sourced from other suppliers.

Despite the volatility, the market may not have fully baked in even a moderate supply disruption. Europe’s LNG benchmark peaked at 227 euros a megawatt hour, equivalent to around $236, soon after Russia invaded Ukraine. It has more than halved since, though prices remain well above prepandemic levels.

Some might dismiss this week’s drama as saber-rattling: Russia and Europe remain energy-interdependent and gas has flowed throughout all manner of regional conflicts. With trust gone, though, there are now real risks to supply. A disruption in Russia’s gas flows to Europe has been the base case of think tank Eurasia Group, according to analyst Henning Gloystein.

There are physical risks. Ukraine is home to the infrastructure that transported about one-third of Europe’s imports of Russian gas in the last three months of 2021, and some oil pipelines too. While Russian forces have refocused on the southeast of Ukraine, missile strikes continue around the country. There is a real chance some energy infrastructure is hit, either intentionally or by accident. Hostilities would make repairs tricky, particularly as Ukrainian transport companies and the Russian energy producers had acrimonious relationships long before the invasion.

Politics also might cause a supply disruption. Initial sanctions steered well clear of European energy flows, but no longer. The U.S. banned Russian oil purchases and the European Union is finalizing a similar embargo. Those sanctions, or other developments like Finland or Sweden seeking to join NATO, could prompt Moscow to retaliate by shutting off gas to more European countries. Kyiv might also be tempted to stop the flows that help fund Russia’s invading forces.

To replace Russian gas, Europe would need to buy the entire LNG spot market,

Shell’s

chief executive said last week. While technically possible, that is unrealistic. Any significant supply disruption would therefore create shortages. A scenario where Russia completely cuts off energy exports to Europe, including gas, would likely cause extreme prices, a large reduction in demand and possibly even power rationing, although blackouts could still be avoided, says Fabian Rønningen of Rystad Energy.

Rystad estimates that current European storage levels would last through most of 2022, barring unexpected weather events. But the outlook for next winter is darker. Germany is most reliant on Russian gas, although estimates for the economic impact of losing it vary widely, from less than 1% of German economic output, to 12%, in an analysis that included second-order effects.

Pipeline diplomacy has kept Russian gas flowing into Western Europe for decades, but the reasons to think this time is different just keep coming.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com