Europe's natural gas stocks have fallen to a record low after the U.S.-Israeli war on Iran squeezed global supply, reviving memories of the 2022 energy crisis that drove inflation and sapped industry profits.
This time round, Europe uses less gas and has more renewable resources. Its shift from Russian pipeline gas towards more globally traded liquefied natural gas, however, could leave it having to pay up for supplies in the event of a severe winter if it fails to fill its storage tanks sufficiently over the lower demand summer months.
So far EU gas stocks are just under 58% full – the lowest for the time of year in records going back to 2011 and 12 percentage points behind last year’s level, data from Gas Infrastructure Europe show.
In 2022, when Russia's full-scale invasion of Ukraine disrupted gas markets, companies rushed to stock up, Russia cut deliveries and prices hit record highs of above €300 ($346) per megawatt hour.
In response, the EU introduced a target to fill storage to 90% of capacity by November. It has since relaxed the goal to 80% by December, to avoid a rush of pre-winter buying that could drive up prices.
European policy makers and traders had also counted on increased use of LNG for restocking, but the closure of the Strait of Hormuz following the outbreak of war in Iran at the end of February removed the 20% of global LNG typically supplied by Qatar.
European natural gas prices were almost double pre-war levels in late July, rising from around €31 per megawatt hour to just below €60/MWh. They have since eased to around €53/MWh on a revival of hopes for a U.S.-Iran peace deal.
PRICE FORECASTS RANGE WIDELY
Depending on when Hormuz traffic normalises, prices this winter could trade within a €60 to €80/MWh range, according to Energy Aspects’ estimates.
However, in a scenario with no Qatari LNG and colder-than-normal weather, the average day-ahead gas price could rise to €110/MWh over November to March and leave storage 10% full by the end of March.
Aiming for a bigger buffer of 16% storage could lift average prices to €210/MWh.
LESS GAS BUT MORE LNG
Compared with 2022, Europe consumes less gas and uses more renewable energy.
A rapid build-out of LNG import infrastructure in Europe has given countries more options to secure supplies than in 2022, when they relied heavily on Russian pipeline gas.
However, Europe's increased dependency on LNG means it no longer has the shelter of fixed-price contracts for gas delivered by pipeline and is vulnerable to possible spikes if it needs to buy more in winter.
Europe's low gas storage has created a "very risky situation," said David Lewis, senior research analyst at Wood Mackenzie.
"If there is a very cold winter or there is an extended period of cold weather, then you might find that you have to do some sort of demand mitigation, higher prices, or else European markets would run out of gas," he added.
EU storage facilities can hold just over most 102 billion cubic metres of gas, and withdrawals cover up to 30% of consumption in a normal winter.
A Commission spokesperson said the EU's latest assessment was that the 80% storage-filling target "is sufficient to secure winter supply and it is technically achievable".
But analysts are doubtful. Forecasts seen by Reuters range from a 67-76% peak in pre-winter storage levels.
To reach even those lower levels, European buyers will have to bid higher prices for LNG cargoes to out-compete buyers in Asia, who need to replace their usual deliveries via the Strait of Hormuz.
The Hormuz disruption increased competition for LNG globally and pushed up prices, putting the market deeper into "backwardation", whereby near-term gas costs more than winter gas.
Buying gas now to store and sell later thus makes little economic sense.
"There is zero financial incentive to fill storage from market prices right now," said Jacob Mandel, research lead at Aurora Energy Research.
Filling Europe's stock to 80% before winter would require storage injections to rise to near-record rates only achievable through government intervention, Mandel said.
There is little appetite for the latter and in addition, EU policymakers are also sticking to an upcoming ban on Russian LNG imports, which applies in full from the end of this year and is intended to cut off revenues funding Moscow's war with Ukraine.
Whatever the final price level, it will ultimately be passed on to households and industries.
"It will mean higher energy bills for this winter and also for the next winter,” Energy Aspect’s senior analyst Erisa Pasko said.
($1 = 0.8658 euros)
