On 12 February, US Defence Secretary Pete Hegseth stated at NATO headquarters in Brussels that it is unrealistic for Ukraine to recover its Russian-occupied territories and that America will no longer act as a guarantor of European security. On the same day, US President Trump had a phone call with Russian President Putin and told his team to start negotiations for peace in Ukraine.

 Senior European officials told the FT that their countries had not been consulted or informed about the phone call, that they expect the Trump administration to present an end to Russian hostilities in the form of a fait accompli for Ukraine to accept, and that the US will leave it to Europe to foot the bill for Ukraine’s post-war recovery.

Ukrainian President Zelensky’s reaction suggested resignation to these moves. Except for French President Macron, who called for Europe to “muscle up” most EU leaders limited themselves to neutral statements that Europe must have a central role in any negotiations on Ukraine.

The lack of a strong common response reflects a deep division among European leaders, between those who hope that Trump represents a temporary exception to the longstanding US-EU relationship, and those who see the latest developments as proof that the US is simply not interested in Europe (at least not in a way that requires financial, military or political commitment).

Gas as part of the deal?

In addition to obvious questions such as ceasefire technicalities, the re-drawing of Ukraine’s borders and its security guarantees, a peace agreement will almost certainly involve the question of where Europe should source the commodity that balances (and tends to set the price in) Europe’s power generation: natural gas.

Russia was, until it invaded Ukraine three years ago, the main supplier of natural gas to Europe. The EU’s effort not to buy fuels from Russia since then has been one of the most important price drivers for the natural gas market – indeed it has impacted Europe’s entire energy complex, including power and carbon markets, with its effects on electricity prices and emissions allowances.

In 2022, skyrocketing gas prices led to a temporary shift from gas to coal in the European power generation mix, breaking a long-term move from more to less polluting energy. Even though prices have come down a lot since then, expensive gas is still seen as the main reason why European consumers and industries face so high electricity bills.

Also, the relative price of gas versus coal continues to be the main factor (alongside the EUA price) in determining the power generation merit order, which decides the power sector’s GHG emissions, and, ultimately, its demand for EUAs.

President Trump has long pushed for Europe to buy American gas, and during his first presidency, he criticized German Chancellor Angela Merkel for moving ahead with the Nord Stream 2 pipeline that would supply Russian gas to Germany.

Now, the US is ramping up its role as a global natural gas supplier, having exported more liquefied natural gas (LNG) than any other country since 2023 – of which two-thirds (nearly 8 billion cubic feet per day) have gone to Europe. Last month, nearly 90% of all US LNG exports went to Europe, some cargo ships carrying LNG were even redirected from Asian destinations to EU ports on the super-high demand.

While Trump wants to sell more gas to Europe, other elements of the trade relationship with Moscow could prove more interesting to his team in our view. In exchange e.g. for access to Siberian minerals and rare earths, we consider it possible that the US lets Russia step back into its former role as Europe’s number one gas provider even if that means American gas is squeezed out.

If so, Europe’s reaction would again be divided initially. The European Commission and an overwhelming majority of member states want to continue the ban on Russian fossil fuels, but some do not. Hungarian PM Victor Orban and his Slovak peer Robert Fico have made no secret about their sympathy for President Putin and their wish to buy more Russian gas. If such a move is condoned by Washington they will surely resist any anti-Russian policy crafted in Brussels.

Gas price dropped on peace deal expectations

Until we see a concrete deal between Washington and Moscow, and as long as we don’t know if European leaders can agree on a common position, the future sourcing of European gas purchases remains uncertain. It might be American, it might be Russian, it might be a mix.

What we did see yesterday, in reaction to Wednesday’s news on the Washington-Moscow peace talks, was that the TTF, Europe’s benchmark index for natural gas, fell 7.7%. The share price of chemical manufacturer BASF and other gas-guzzling companies rose, reflecting expectations of falling gas costs, something that would enable them to compete with non-European rivals.

EUAs saw a more modest drop yesterday, down 2.8%, while German power front-year dropped 5.3%.