European Gas Prices Surge as Russia’s Putin Casts Doubt on Ukraine Transit Deal

European natural gas prices jumped on Friday, driven by concerns that a deal to maintain Russian gas flows through Ukraine is unlikely, following comments from Russian President Vladimir Putin, Bloomberg reports.

Benchmark futures surged as much as 5%, marking the largest increase in a week.

Putin said on Thursday that a new transit agreement before the current one expires at the end of the year was “impossible,” throwing the future of gas supplies to Europe into uncertainty. The current agreement ensures gas flows via Ukraine to several Central European nations.

While these nations have proposed alternative solutions to ensure continued gas transit, Ukrainian leader Volodymyr Zelenskiy has rejected any arrangements. According to Heorhii Tykhyi, spokesperson for Ukraine’s Ministry of Foreign Affairs, as of now, there will be no transit of Russian gas through Ukraine starting January 1.

Despite the grim outlook, some hope remains for a last-minute deal, given the history of agreements forged at the eleventh hour during previous gas disputes between the two countries. Tykhyi added that Ukraine is open to considering proposals from the European Commission to ensure regional energy security.

Adding to the bearish sentiment, no capacity at the Slovakia-Austria border point was booked for January at Friday’s auctions, further fueling concerns about gas flows into Europe.

Putin also cited that several proposals allowing other nations like Hungary, Slovakia, Turkey, or Azerbaijan to control the gas transit through Ukraine, were difficult to implement due to long-term contracts held by Gazprom PJSC, which are hard to alter.

The gas flows at risk officially represent around 5% of Europe’s total demand. Although this is a relatively small percentage, the cessation of these flows would force European countries to rely more heavily on alternative sources such as piped gas from Norway or liquefied natural gas (LNG) from the US, potentially leading to price spikes.

Traders are also closely watching European gas storage levels, which have fallen below 75%. Putin has also indicated that a lawsuit by Ukraine’s Naftogaz, alleging Gazprom’s non-payment for transit services, is a barrier to any agreement and must be withdrawn.