Europe's Gas Reserves May Not Stabilize Winter Prices

The European Union has effectively achieved its objective of reducing its reliance on Russia's natural gas. This has ensured that there are no fuel shortages or blackouts, as many had feared during last winter's energy crisis. Previously, the bloc relied on Russia for approximately half of its gas imports. However, it has successfully increased imports of piped and liquefied natural gas (LNG) from other sources, expedited the approval and development of LNG infrastructure, and encouraged its citizens to reduce energy consumption. All of these efforts were implemented within a span of 20 months since Russia's invasion of Ukraine.

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The bloc's gas storage facilities achieved an outstanding score of 99% during a recent test, surpassing the 90% benchmark set by the EU's executive body for member states to achieve by the beginning of November, when the heating season commences.

Moreover, Europe's gas requirements are steadily decreasing due to long-term trends. In reference to "mature markets" like Europe, North America, and parts of Asia, the International Energy Agency (IEA) predicted a yearly decrease of 1% in demand for fuel until 2026. This decline is attributed to countries' emphasis on expanding renewable energy sectors and enhancing energy efficiency.

Gas shortages are unlikely in Europe this winter, but concerns persist over the price of the fuel. Commodity market prices in the region have surged by 28% in the past month and were already nearly twice their historical average for this time of year.

The Hammerfest LNG plant in Norway. The EU has ramped up imports of LNG since Russia's full-scale invasion of Ukraine.

According to the IEA, the surge in LNG supply did not adequately counterbalance the significant decrease in pipeline gas shipments from Russia to Europe. Consequently, the IEA expressed worry about the possibility of price instability, especially in the occurrence of a harsh winter.

The volatility increases the possibility of European price increases and is a reflection of Europe's limited options to obtain additional gas if necessary. If the upcoming winter is colder than expected, or if Russia ceases all piped gas exports to European countries, including Hungary and Austria, Europe may require more fuel, says Moodys.

In Europe's constrained market, traders are highly responsive, according to Jack Sharples, a senior research fellow at the Oxford Institute of Energy Studies. He points out that Norway, Azerbaijan, and Algeria, some of the bloc's major suppliers of piped gas, do not have significant excess capacity.

He informed CNN that any indications of increased demand or limited supply will cause prices to rise significantly.

Moody's predicts that fuel prices in Europe will continue to be higher compared to other regions.

Escalating conflict?

The reliance on energy-intensive industries has made high gas prices a significant economic challenge for certain European countries, notably Germany, which has the largest economy in the region.

The price of Europe's benchmark gas contract surged from €36 ($38) to €47 ($50) per megawatt hour since October 5, when a series of geopolitical risks rattled traders' confidence.

On October 7, Hamas, a Palestinian militant group, launched a devastating attack on Israel resulting in the death of over 1,400 people, predominantly civilians. In response, Israel initiated airstrikes on the Hamas-controlled Gaza Strip, subsequently deploying ground troops into the region.

In this September 2, 2015 file photo, a rig is seen in the Tamar natural gas field in the Mediterranean Sea, off the coast of Israel.

Marc Israel Sellem/AP

Israel just shut a gas field near Gaza. Heres why that matters

The ongoing fighting has raised concerns about the potential for the conflict to escalate and impact the Strait of Hormuz, a crucial waterway that facilitates the exportation of LNG. S&P Global reports that approximately 20% of the world's LNG supply passes through this strategic channel located on the southern coast of Iran.

The attack by Hamas has resulted in Chevron (CVX), an energy giant, closing down its Tamar gas field located off the southern coast of Israel. This gas field exports fuel to neighboring countries such as Jordan and Egypt. As a consequence of decreased gas flows from Israel to Cairo, where some of the gas is converted into LNG for international shipping, analysts inform CNN that there might be a reduction or complete absence of Egyptian LNG exports during the winter season.

A hair-trigger market

Over the weekend, while Hamas launched an attack on Israel, another development occurred in Finland. The gas transmission operator of the country announced a temporary closure of the pipeline that connects Finland with Estonia due to a suspected leak. However, it was later confirmed by the operator that the pipeline will remain closed for a minimum of five months. Meanwhile, news broke that workers at two major LNG facilities in Australia were planning to initiate a strike.

In a less jittery market, neither incident may have had the effect it did, helping boost European gas prices by more than 40% over the course of a single week.

Finnish officials at a press conference on the investigation into a possible attack on the Balticconnector gas pipeline on October 24

Heikki Saukkomaa/AFP/Lehtikuva/AFP/Getty Images

The Finnish authorities have initiated a criminal inquiry into the intentional destruction of the pipeline, raising concerns about the susceptibility of Europe's essential infrastructure. This incident comes shortly after a string of explosions affected the Nord Stream 1 pipeline, which previously served as the primary conduit for Russian gas in the region.

Regarding the intended strike related to wages and working conditions at Chevron's LNG facilities in Australia, the situation ultimately dissipated. However, this event serves as a prime example of the interdependence within the worldwide natural gas market, as stated by Simone Tagliapietra, a senior fellow at the think tank Bruegel.

He informed CNN that these strikes have no direct impact on Europe, but they do have a global effect on the LNG market as a whole. Consequently, European prices soar due to events occurring in Australia. Regarding Europe's winter supply, he mentioned that it is secure. However, their dependence on LNG for extra provisions implies that any unforeseen circumstances could lead to an increase in prices.

According to Bill Weatherburn, a commodities economist at Capital Economics, he stated in a recent note that Europe's dependence on LNG has led certain countries in the region, such as France and Italy, to enter into 27-year contracts with Qatar for fuel. These long-term LNG import agreements go against the bloc's previous tendency to avoid such commitments.

A flood of LNG

Still, Europe can breathe easier this winter and may be in a much better position this time next year.

Gas prices have plummeted by 86% from their record peak of €339 ($357) per megawatt hour, reached in August 2022 as EU member states raced to secure sufficient gas before their first winter without abundant Russian exports.

Furthermore, the bloc can expect a surge of new liquefied natural gas (LNG) supply entering the global market in the coming years, as projected by the IEA.

According to its annual World Energy Outlook, the agency anticipates that by 2030, approximately 250 billion cubic meters of new liquefaction capacity, which involves cooling natural gas into a liquid state for transportation, will be added. This amount is nearly equivalent to half of the current worldwide supply of LNG.

The Gascade Gastransport gas hub in Lubmin, Western Pomerania, Germany, serves as an important energy facility. However, Europe's largest economy continues to face economic challenges due to the high prices of gas, which greatly impact its energy-intensive industries.

The IEA anticipates a significant surge to occur between 2025 and 2027. In a similar vein, Weatherburn predicts that starting in early 2024, there will be a substantial influx of LNG supply entering the global market. He further states that this influx will exert substantial pressure on European natural gas and Asian LNG prices.

Weatherburn stated that several LNG export terminals in the United States and the initial phase of a significant offshore gas field expansion in Qatar will be finished in the next two years. According to Weatherburn, these accomplishments will likely decrease European gas prices to €30 ($32) per megawatt hour by the end of next year.