Europe’s energy crisis takes a surprise turn

Now, the storage facilities are nearly filled before Europeans have even turned up the heaters, thanks to an unusually warm winter and successful cargo bidding. Gas prices have also fallen back sharply, and are less than a third of their summer peak.

This does not mean that Europe is completely ready to face the winters, much depends on the weather. A cold snap would quickly see Europe dipping into its stockpiles. Governments are particularly concerned about the possibility of additional attacks on energy assets, which could completely change the market. However, the continent is in better position at the end of October than policymakers expected.

Since last year, Russia’s gas exports have decreased. The crucial Nord Stream pipeline’s flow was stopped this summer before it was damaged by several explosions last month. For the time being, mild weather is helping to restrain demand, but European authorities are concerned that when temperatures drop, increased consumption would result from reduced gas prices compared to the summer spike.

Giacomo Masato, lead analyst and senior meteorologist at the Italian energy company Illumia said, “The European gas glut is expected to last until at least December. It is unlikely Europe will see a prolonged cold spell in November.”

Although the price of gas hasn’t been this low since June, there are still risks in the market. Supply concerns are anticipated to persist as evidenced by the fact that February futures are trading at a 44% premium to November and winter expenses are also higher.

Thus, despite the allure of cheaper pricing, lowering utilisation is still necessary. In 2022, Timera Energy estimates that there would be a 7-9% decrease in gas demand, “primarily driven by shutting in of large industrial customers.”

“Europe’s ability to navigate a parallel power and gas crisis across the next two years depends strongly on its ability to reduce demand,” analysts at Timera said in a blog. “We think the crisis is far from over.”

According to Gas Infrastructure Europe, European storage is 93.6% full and Germany is at 97.5% due to Europe’s efforts to increase reserves. While that gives the market some solace, in Germany it only covers demand for two months of colder weather, so Europe will need to continue luring LNG shipments.

Bloomberg’s weather model, however, predicts that the weather will continue to be milder than normal well into November.

This month, Northwest Europe is expected to receive 82 LNG tankers, a 19% increase over September. According to shipbrokers Fearnleys A/S, more vessels are extending their stays in so-called floating storage in expectation of increasing fuel prices and in light of the limited capacity to receive the fuel. According to Oystein Kalleklev, the chief executive of LNG shipowner Flex LNG Ltd. in Oslo, this situation could linger until mid-January.

The loaded tanker index for Bloomberg has increased to its highest level since at least 2017. Spain’s Enagas SA issued a warning last week that it may need to restrict quantities since it has limited space to absorb surplus imports.

Although prices are currently declining, demand from Asia may build up and Russia may still stop gas flows that pass through Ukraine, either on purpose or as a result of infrastructure damage as the battle continues. Both would increase price pressure and make it harder to fill storage the next year.

European energy ministers are also debating a short-term ceiling on benchmark gas prices at the moment. The possibility that the move will make it harder for Europe to continue drawing the LNG it needs this winter is one of the key arguments against it.

Katja Yafimava, senior research fellow at the Oxford Institute for Energy Studies said, “As temperatures start to drop and storages get emptied, the market reality of supply-demand mismatch will mean higher prices, translating into further inflationary pressures. This problem is likely to become more acute during the next winter.”

(With inputs from Bloomberg)