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Russia-Ukraine Crisis Could Spark a Surge in Europe's Gas Prices, Topping Last Year's Highs

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  • If the Russia-Ukraine crisis escalates, gas prices in Europe – which soared to highs last year – could surge further, research firm Capital Economics said in a note over the weekend.
  • "It's a very tight gas market ... and there's no question that this sense of imminent crisis building with Russia and Ukraine is also hanging over the market, particularly since Russia does provide about 35% of Europe's gas," energy expert Dan Yergin told CNBC on Monday.
  • A massive gas crunch in Europe last year led to European power prices spiraling to multi-year highs.
  • As it is, gas supplies from Russia were already lower than usual, Jefferies pointed out in a note on Sunday.

Growing tensions between Russia and Ukraine have cast a shadow over energy markets, and the uncertainty could mean a prolonged period of high gas prices for Europe, analysts say.

"It's a very tight gas market ... and there's no question that this sense of imminent crisis building with Russia and Ukraine is also hanging over the market, particularly since Russia does provide about 35% of Europe's gas," energy expert Dan Yergin told CNBC on Monday.

If the crisis escalates, gas prices in Europe – which soared to highs last year – could surge further, warned research firm Capital Economics in a note over the weekend.

William Jackson, chief emerging markets economist at Capital Economics pointed out that in addition to Europe's reliance on Russia for gas, stock supplies are also low right now.

"Were sanctions to be placed on Russia's energy exports or were Russia to use gas exports as a tool for leverage, European natural gas prices would probably soar," he said.

Tensions between Russia and Ukraine have ratcheted up in recent months amid multiple reports that Russian troops have amassed at the border with Ukraine.

The development prompted speculation that Russia is preparing to invade the country and set off fears of a repeat of Moscow's illegal annexation and occupation of Crimea in 2014. Moscow has repeatedly denied those allegations.

Talks aimed at defusing the crisis ended last week without any breakthrough.

U.S. representatives and NATO members emerged from several days of high-stakes discussions with top Russian officials with no resolution – but with warnings that the situation along the Ukraine border is in fact getting worse.

The imminent crisis has sparked talk the U.S. could impose sanctions on Russia to stop the Kremlin from invading Ukraine.

If that happens, according to Capital Economics, European gas prices will probably exceed the peak of 180 pounds per MWh seen late last year.

"And some states that are very heavily dependent on Russian gas, particularly in Eastern Europe, might be forced to ration power," Jackson added.

A massive gas crunch in Europe in the third quarter last year led to European power prices spiraling to multi-year highs.

European Commission Executive Vice President Valdis Dombrovskis told CNBC that tensions with Russia are "a cause of concern," not only due to security risks but they may also have "an economic dimension."

Spanish Finance Minister Nadia Calvino also added in an interview with CNBC that "everybody is very well aware that we have to take very seriously the geopolitical situation and the possible impact on energy prices. And we have to provide a European response as soon as possible."

Gas supplies from Russia lower than usual

As it is, gas supplies from Russia were already lower than usual, Jefferies pointed out in a note on Sunday.

Imports of gas from Russia into Northwestern Europe from the August to December period were down by 38% compared to the same period in 2018, according to the U.S. investment bank.

Gas stockpiles in Europe are also lower than average – and are down by 21% as of Jan. 12, versus the five-year average, the firm said.

"We expect the period of high natural gas prices to be protracted. Gas flows from Russia will remain low as we enter the 2021/22 heating season with record low stockpiles," said Jefferies.

"There was this tendency when this crisis began late last year, to say 'oh it's a one-off,'" Yergin said, referring to the European gas crunch in 2021. "But if you look at the demand trends, level of investment, you could see this being recurrent."

— CNBC's Silvia Amaro contributed to this report.

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