UKRAINE CRISIS: Energy markets braced for US, European response

Quantum Commodity Intelligence - Energy markets remained in a state of heightened volatility Tuesday after Russia recognised two pro-Moscow regions of Ukraine as independent and moved in troops, with investors looking for signs of further Russian incursions and the response from Europe and the US.

Hard-hitting sanctions would likely target Russia's energy exports, but with Europe highly reliant on oil and gas from the energy giant, direct action against exports to Europe is seen as unlikely, at least in the short term.

"The EU's high level of dependence on Russian oil and gas argues against sanctions being imposed in this area. However, Russia could retaliate to the anticipated sanctions by reducing its deliveries," said Carsten Fritsch of Commerzbank.

Germany, Russia's biggest customer for natural gas, said it would suspend the certification of the NordStream 2 pipeline, which is not expected to start operations until later in the year anyway.

The UK has announced sanctions against three Russian individuals and five banks, but these are were seen as unlikely to have any impact on immediate Russian energy supplies to Europe or elsewhere.

Benchmark Brent futures for April traded in a range of $96.48-$99.50/b amid at times sharp swings, while Dutch TTF futures for March traded in a €75.76/MWh to €82/MWh range, ending the day around 10% higher.

Russia's parliament fast-tracked treaties with the two breakaway regions the day after President Putin announced he recognised the independence of the two enclaves, which have been partially controlled by Russian-backed separatists since 2014.

Invasion

The White House has begun referring to Russian troop deployments in eastern Ukraine as an "invasion" after initially hesitating to use the term – a red line that President Joe Biden has said would result in the US levying severe sanctions against Moscow, reported the Associated Press Tuesday.

Should Russia advance beyond combat zones in Donetsk and Luhansk into the rest of Ukraine, analysts see further pricing upside and elevated volatility, while traders are also looking for signs of harsher energy sanctions or retaliatory measures from Russia.

However, there have been calls for immediate firm action against Russia, regardless of the impact on European energy supplies.

"If the West's response is simply rhetorical, Putin will smell weakness and escalation is likely. The West must respond now. That means impose some sanctions immediately—strong sanctions," said the Atlantic Council, an influential American think tank in the field of international affairs.

Iain Duncan Smith, former Conservative leader, warned Prime Minister Boris Johnson that the UK's sanctions package does not go far enough.

"Should it not be that we need to hit them, if we are going to hit them, with sanctions hard and hit them now?" he asked MPs.

Western nations have accused Russia of compromising Ukrainian sovereignty, while Moscow contends that NATO has repeatedly breached a 1990 agreement that limited the eastern expansion of the military alliance.