As Europe enters the heating season with natural gas inventories at the lowest level in a decade, policymakers, consumers, and industries are left at the mercy of the weather, hoping for a mild winter to avoid further tightening of the already tight European gas market.
Following the colder than usual 2020/2021 winter, Europe has been struggling to fill gas storage sites to adequate levels in recent months as Asian buyers have been snapping up LNG cargoes. Buyers prefer to ship LNG to Asia where the price of gas per million British thermal units is higher than the equivalent prices in Europe.
Despite the fact that the global gas price surge originated from woefully low inventories in Europe and led to record Asian LNG spot prices, Asia is winning the bidding war for spot LNG supply, leaving Europe undersupplied.
This winter, unlike last winter, major LNG buyers such as Japan and South Korea have moved to secure more supply and be prepared if this winter is as cold as the previous one.
As a result, “Europe has had less free flowing supply to replenish gas storage, and now the region is heading into winter with storage only 71% full, BloombergNEF estimates, compared to the five-year seasonal norm of 92%,” BNEF said in an analysis this week.
In this situation of low gas inventories and an already tight gas market, a colder winter could send Europe’s gas prices soaring to new record highs in coming months, accelerate the rush to coal and oil products, and leave Europe with no gas in storage at the end of the heating season. This would support high gas prices through 2022 as the continent will have to replenish supply before the next winter comes.
“Europe could end up with almost no gas left in storage after a colder-than-normal winter, but above seasonal norms at the end of a warm one,” BNEF analysts say.
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In case of a colder winter, Europe will need extra supply, and it’s unlikely that this would come from too much additional LNG, especially in a similarly colder winter in Asia, which has the motivation and purchasing power to outbid cargoes away from Europe.
“Barring an exceptionally mild winter, the low inventory level for gas and expected sustained demand are likely to keep gas prices in Europe and Asia at high levels until the second quarter 2022,” TotalEnergies said in its Q3 results release this week.
Norway, Europe’s second-largest gas supplier after Russia, is boosting gas deliveries this winter season after Equinor was allowed to raise gas exports from the Oseberg and Troll fields.
Yet, Equinor says that even a normal winter—let alone a colder one—would be a strain on European gas supply.
“But a normal winter and colder than normal winter would be a lot of strain on the gas supply, especially, if we see LNG (liquefied natural gas) continues going to Asia and we don’t see a change in gas supplies from Russia,” Equinor’s CEO Anders Opedal told Reuters in an interview this week.
Russia signaled this week it would start filling European storage sites once Gazprom completes the filling of the Russian storage. But Moscow also says that an immediate boost to supply for European customers would come as soon as German authorities approve the controversial Nord Stream 2 pipeline.
Russian President Vladimir Putin told Gazprom’s CEO Alexei Miller on Wednesday that as soon as the Russian gas giant completes filling Russia’s underground storage by or on November 8, “I would like you to start consistent and planned work on increasing the amount of gas in your underground depots in Europe – in Austria and Germany,” per the English translation on the Kremlin website.
Europe may not have enough natural gas to meet demand in a cold winter, especially if Asia’s winter is cold too, unless Russian gas deliveries rise, energy consultancy Wood Mackenzie said in early October.
Under normal winter weather conditions, Europe will not have a problem with meeting demand, despite the current low storage levels, said Massimo Di Odoardo, Vice President, Gas and LNG Research, at WoodMac.
“The system creaks if there’s a cold winter in both Europe and Asia. Higher demand for heating could add up to 20 Bcm in Europe and 10.5 Bcm in Asia, resulting in lower LNG imports available to Europe. That would suck up all the gas left in European storage, and gas prices could go much higher than we’ve seen so far,” he said.
“The sky could be the limit for European gas prices this winter,” Di Odoardo added.