At the risk of tempting fate, the European Union energy commissioner offered a rather upbeat summary of the continent’s recent natural gas plight. The EU, Kadri Simson said last week, came out of the winter with “storages half full” and a “positive outlook for next winter.”
European gas prices, which peaked last year at more than €330 ($362) per megawatt-hour, have now plunged to €35 — the lowest since the 2021 summer although still double the historical average.
Will it last? Perhaps for now.
Europe got lucky last winter. Thanks to mild temperatures, which significantly curbed consumption, and China’s zero-Covid policy, which let Europe import lots of liquefied natural gas that otherwise would have been unavailable, the continent’s gas storage bottomed out at 55% of capacity at the end of the heating season, well above the 10-year average of 33%.
But emerging from the winter with so much gas in storage came at a price. Although Europe avoided a recession, output in the energy-intensive industrial sector contracted significantly. Ask any European industrialist, and they would tell you the crisis isn’t over for them.
Regardless of the cause, with far more gas leftover than expected, replenishing storages to Brussels’ target of 90% of capacity ahead of next winter will be a lot easier. The outlook is indeed positive.
To reach that 90% target, Europe needs to inject about 35 billion cubic meters of gas into storage between now and late October, well below the 10-year average of about 55 billion. Last year, Europe bought around 70 billion to inject into storage — one of the reasons why prices surged to an all-time high. Even if the continent pushes its storage to 95% of capacity, the amount of gas needed would be smaller than in any injection season of the previous decade.
The market is pricing an easy-peasy scenario. Gas contracts for immediate delivery are trading at a significant discount to contracts for the 2023-2024 winter. It’s both a sign that supplies are plentiful for the current injection season, as well as an indication that the market believes European demand needs to be curtailed again next winter via punitive high prices. Gas contracts for January-February 2024 are trading near €60 per megawatt-hour.
Regional gas stockpiles have already increased to 60% of their capacity, a level that they didn’t hit in 2022 until early July. At the current pace, the 90% target would be surpassed well before October, perhaps as soon as late August or early September, though this would depend, in large part, on whether the region can continue buying as much LNG as it wants.
Without Russian piped gas, LNG shipments have effectively become the new baseload supply for Europe, replacing the role that Russian state-owned Gazprom played in yesteryear.
According to the International Energy Agency, LNG accounted for two-thirds of the region’s imports through the crucial 2022-2023 winter season. Of that, about half came from LNG cargoes that were diverted from China, where the shipments weren’t needed due to the impact of zero-Covid on industrial demand, traders say. Another chunk came from other Asian nations, including India, Bangladesh and Pakistan, which were priced out from the LNG market and instead burned coal for electricity generation.
A small, but important, sliver came from Russia itself, as Europe continues to buy Russian LNG. (Remember: Brussels imposed sanctions on Russian oil exports but left gas supply untouched. The reduction in gas flows from Russia to Europe is the result of the Kremlin cutting shipments via pipeline, not European retaliation for Moscow invading Ukraine.)
For now, China still isn’t buying much LNG, freeing cargoes to go to Europe. Wael Sawan, the chief executive officer of Shell Plc, one of the world’s biggest LNG suppliers, put it succinctly last week, saying that “prompt” LNG demand was “weak.” But Sawan warned Europe about the short-termism of “for now,” noting that Chinese consumption was “starting to really pick up.”
After China abandoned its zero-Covid policy in the final days of 2022, the market anticipated a rapid rebound in energy demand. This didn’t materialize the way many had expected. While consumers are back in full swing, pushing up demand for jet-fuel and gasoline, the manufacturing sector, which uses LNG, has recovered more slowly.
Industry executives believe Chinese industrialists were scared about a potential snap-back into zero-Covid and so restarted factories gradually. At the same time, Western demand for Chinese goods has been depressed due to plenty of supply in the US and Europe.
This may last for a few more months, giving Europe enough time to replenish its gas storage and averting a crisis in the winter. But punting on good luck is never a good long-term strategy.
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