Ukraine setting agenda for natural gas market

European natural gas prices fell the most in more than two weeks after Ukraine agreed to allow Russian humanitarian aid across its border and talks between the two former Soviet nations brought some progress.

Gas (NYMEX:NGQ14) for next-month delivery in the U.K., Europe’s biggest market, slid as much as 4.2% on the ICE Futures Europe exchange in London, the biggest drop since Aug. 4. September Dutch gas fell as much as 3.4%, the most since Aug. 1, according to broker data compiled by Bloomberg. A Russian aid mission of about 275 trucks will proceed through the Ukrainian border under the supervision of the International Committee of the Red Cross, which will inspect the cargo and distribute it.

Ukrainian Foreign Minister Pavlo Klimkin said talks with Russia started this weekend in Berlin had brought “moderate progress,” while his Russian counterpart Sergei Lavrov said progress was made in securing the border between Russia and Ukraine. The nations discussed a “badly needed” cease-fire, said German Foreign Minister Frank-Walter Steinmeier. Russia supplies about 30% of Europe’s gas needs, half of which travels through Soviet-era pipelines crossing Ukraine.

“There appears to have been a limited improvement over the weekend,” London-based consultant Energy Aspects Ltd. said in a report e-mailed today. “The Russian and Ukrainian foreign ministers met in Berlin on Sunday for talks aimed at ending the fighting. While a cease-fire still appears elusive, the two sides talking represents a measure of progress.”

Front-month U.K. gas dropped 3.2% to 43.39 pence a therm ($7.26 a million British thermal units) on ICE at 2:03 p.m. in London after rallying as much as 4.5% in the last trading session after Ukraine said it had attacked and partially destroyed a Russian armed convoyed that crossed the border. Dutch fuel fell to as low as 18.35 euros ($24.56) a megawatt-hour on the Title Transfer Facility hub before trading at 18.45 euros a megawatt-hour, broker data showed. The price climbed as much as 4.2% on Aug. 15.

European leaders are pushing for an end to the conflict that’s killed more than 2,000 people. The European Commission, the European Union’s regulatory arm, has also been trying to broker a deal between Russia’s OAO Gazprom and NAK Naftogaz Ukrainy that would allow supplies to flow normally. The Russian pipeline-gas export monopoly halted supplies to Ukraine June 16 over a price and debt disagreement. Similar disputes in 2006 and 2009 disrupted gas flows to Europe amid freezing weather.

“Weather and autumn has begun to add seasonally support, but the sharp move higher on Friday clearly shows the nervousness that remain,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, said by e-mail today. “The ebb and flow of news related to Ukraine continue to set most of the current agenda in the European gas market.”

Ukraine passed a bill last week that enables the country to impose sanctions on Russia that may include banning Gazprom from transiting fuel through Ukraine and forcing European companies to buy gas at the Ukrainian border. If the sanctions are imposed, further gains in gas prices should be expected, according to Energy Aspects.

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