(Bloomberg) -- European gas prices jumped after Austria’s OMV AG said Russia will cut off fuel deliveries from Saturday.
Gazprom PJSC notified Austria that it will cut supplies to zero, according to a filing by OMV. The halt comes after the Austrian energy company said on Wednesday it would stop payments to the Russian firm to recoup a €230 million ($242 million) arbitration reward.
The region’s benchmark contract rose as much as 2.7%, reversing earlier losses. Prices settled at the highest in about a year.
The Nov. 16 cut-off is a significant event even with Europe’s efforts to move away from Russian gas. A handful of countries including Austria remain key buyers of the fuel, which is piped through Ukraine under a transit deal that is set to expire at the end of the year.
The halt means Austria will need to manage without Russian supplies sooner than expected, and could have ripple effects in an already tight market. European gas prices have risen around 30% since the end of July, as stockpiles are being withdrawn faster than usual due to chilly weather and a slump in wind generation.
“Prices are rallying because the halt to Austrian deliveries comes a few days earlier than anticipated, which is adding fuel to fire,” said Florence Schmit, a European energy strategist at Rabobank. “While the market is at present well supplied, this halt means stronger storage withdrawals during winter will be necessary as well as higher demand for liquefied natural gas.”
For now, nominations for Sudzha, a cross-border point on the Russian-Ukrainian border show usual level of flows for Saturday, data from Ukraine’s grid operator show. Russian gas flows to Austria via Ukraine and Slovakia.
Austrian energy regulator E-Control said that authorities are monitoring the supply situation. “However, due to the high storage levels and the possibility of substitution via other transport routes, it is assumed that the supply to Austrian gas customers will remain secure,” it said in a statement.
Gazprom didn’t respond to a request for comment.
The announcement is a turning point for Austria, which has maintained one of Europe’s oldest and deepest connections to Russian energy, and in 2018 extended a long-term gas contract to 2040. Much of the region has weaned itself off Moscow’s gas in recent years, with Austria — OMV’s home market — Hungary and Slovakia the biggest remaining importers of fuel.
OMV has said it can meet supply obligations via other sources even if its long-term contract is disrupted. Landlocked nations such as Austria can access alternatives such as LNG, which is more expensive and includes costs to regasify it and move it from terminals.
The supply cut also comes as cooler temperatures and lower wind output have led to accelerated withdrawals of gas from storage sites. That could leave less gas available for later in the winter when heating needs pick up.
Stronger withdrawals would also make it more challenging to replenish inventories next summer. That has kept prices for summer elevated compared to those for next winter.
The supply cuts paired with frigid weather, may support gas prices north of €47 a megawatt-hour in the near term though underlying demand signals still look weak going into 2025., Bloomberg Intelligence analysts Patricio Alvarez and Joao Martins wrote on Friday.
The cost of hedging against surging prices during next year’s stockpiling season has also gone up. The implied-volatility gap between Dutch options for April, when traders start building up inventories, and those for winter 2025 is now at the highest this year.
Dutch front-month futures, Europe’s gas benchmark, settled 0.7% higher at €46.55 a megawatt-hour in Amsterdam.
©2024 Bloomberg L.P.