Ukraine: where are we now

Let’s give a short insight to what has happened in the past months in Ukraine. For the second time in six years Mr. Putin has led his troops across an internationally recognized border, and it does look like the situation won’t be changing soon. All of this happened as a result of a series of steps taken by the Ukrainian government (later halted by former President Yanukovych) to draw closer to a type of Europeanization that indeed Russia has always been strictly opposed to.

The concern in the markets here is that Europe severely relies on gas imported by Russia. Should gas taps be sealed, it is said Europe and Ukraine may have a 1 to 3-month storage autonomy before running out.
30 % of Europe’s gas is supplied by Russia, and primarily by Gazprom. We won’t go into the whole “traded on hubs LNG model” vs the “Long Term Contract Model” used by Russia argument, because with no doubt a free market environment would create a freer and more competitive trading platform like that in which oil is traded, but let us just say that said platforms have had their deal of problems in the past years and have experienced issues of low liquidity and ineffective pricing systems. In addition, while oil markets are competitive and LTCs are not an issue for customers, oil-trade is futures-based, as our colleagues this week clearly explain here. Only a futures-based market similar to the one for oil could provide European benchmarks for gas, but still much needs to done.
The question here is what alternative suppliers will enter the market now that the situation is escalating:
there are talks of European sanctions forcing Russia to retreat from Ukraine, and by now we don’t feel confident in saying that a resolution is shortly on the way. On Friday diplomatic talks between the US secretary of state and Russia’s foreign minister led to no agreement whatsoever. This Sunday will be the day of the Ukrainian referendum as decided by the Russians and markets fear sanctions against Russia may take place as early as Monday morning. The risks are more on the energy side than on any other: looking at trading partnerships, Russia is not even in the Top 15 of the U.S., while it is third for the EU. As we said, the issue lies in the energy markets.

So what is our trade idea here?

There are a couple of energy suppliers that may enter taking the place of companies of the likes of Gazprom (which this week said it would stop providing gas at discount rates to Ukraine).
The U.S. is preparing its own resources as a lever against Russia; largely because of fracking, the U.S. have recently surpassed Russia as the world’s bigger producers of this commodity. The problem is that American gas producers will not be ready to export before late 2015 at the least. The U.S.’s plan here is that to create a future embargo in order not to force its allies to rely excessively on imports from Russia, but to be more free in the choice of acquired resources. The chart above shows Gazprom’s major buyers of national gas. We see Germany, Ukraine and Turkey as the biggest importers. If Russia was to cut off supplies, we would consider shorting the three benchmarks in question. Let us take a look at history for a moment: 2006 provides us with a parallel situation: Gazprom had turned off the taps after threats concerning price hikes. The impact was immediate and quite critical.
Same thing happened in 2009, and the situation forced schools and public buildings to close in south-eastern Europe’s most gas dependent countries. Actually, we may not see such a bad effect on the economy today as dependence has long since decreased and we are coming out of the cold season which usually sees gas demand at its fullest. It has also been a very mild winter, and demand for gas is due to decrease (it is at its lowest level since 1999 – UK gas consumption is approaching a 12-year low).
In addition, structural changes are important in this matter: Gazprom has been using new pipelines via Belarus and the Baltic sea in order to reach out to the rest of Europe, which means only 15 % of the EU’s gas relies on Ukrainian pipelines.
This is why shorting European benchmarks next week may not prove to be the best move, but what could be a good trade would be going long on a company such as Statoil. It is a Norwegian company that in 2012 sold more gas to European countries than Gazprom did. Even though exports to Europe fell in 2013, Statoil holds good prospects for the future and its share price will strongly be pushed up by recent events. In fact, in the near future it could strongly surpass Gazprom’s dominance in the gas market. We forecast a hike in Statoil’s price in the coming weeks and we also consider the idea of shorting Gazprom shares, trade that has already yielded great returns.

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