This winter, Europe was able to successfully fill its gas storage, but the energy crisis is still very much alive. When the supply of Russian pipeline gas is reduced to, at worst, a trickle next winter, the situation for Europe could actually get worse. According to estimates by the European economic think tank Bruegel provided by the International Monetary Fund, total energy expenditures for families and businesses in Europe have already increased by $1.06 trillion (1 trillion euros) (IMF). According to Bruegel’s experts, this amount would amount to a staggering 6% of the EU’s yearly GDP if European governments did nothing more than provide financial support and cover price rises. According to Bruegel’s experts, “massive government support could postpone adjustment to a new price equilibrium and generate the need for even more support.” Instead, the EU needs a “great agreement” to boost supply while also promoting savings.
Whether Europe can manage the energy crisis without resorting to obligatory rationing or without losing too much industry competitiveness will be determined over the course of the next 12 to 24 months. This month’s Arctic blast, which swept through the majority of northwest Europe and brought cold temperatures, snow to the UK, and lowering wind speeds to Germany, placed Europe’s energy infrastructure to their first genuine test. According to Gas Infrastructure Europe, natural gas storage facilities in the EU began to lose gas, with storage levels at 84% as of December 17. Although inventories are larger than they were at this time last year, Europe will really be put to the test the following year when it must adequately fill gas storage sites to meet the demand for the winter of 2023–2024. Depending on how low stockpiles will be after this winter and whether the EU has the capacity to haul in continuous record levels of LNG and continue outbidding Asia, especially if demand in China recovers following a reopening from severe Covid limits, here is where the planning becomes trickier. According to EU data from September, the EU has continued to reduce its reliance on Russia, which accounted for about 40% of imported gas supplies before the Russian invasion of Ukraine, thanks to lower gas consumption and little Russian gas coming via pipelines.
However, this year’s big decrease in Russian gas supply didn’t start until June. Without Russian gas, Europe’s gas supply shortfall will be substantially larger before winter 2023/2024. Compared to relatively stable imports from Russia in the first half of this year before Moscow started gradually reducing volumes via Nord Stream in June and then shut down the pipeline in early September, Europe won’t be importing much Russian gas—or none at all if Russia cuts off deliveries via the one link left operational via Ukraine and via TurkStream. In 2023, the EU may experience a 27 billion cubic meter imbalance between supply and demand for gas if Chinese LNG demand returns to levels seen in 2021 and Russian gas supply declines to zero. According to commodity trader Trafigura, Europe would require “large amounts” of LNG in 2019 due to the decline in Russian pipeline gas deliveries. In its annual report for the year ending September 30, Trafigura stated, “Looking ahead, we expect gas and LNG markets to continue volatile.”
The substantial fall in Russian flow rates means that while Europe can avoid a blackout this winter by using up supplies and reducing demand, it will still need to import enormous amounts of LNG in 2023, according to Trafigura. According to Trafigura, natural gas prices in Europe will need to be high in order for the continent to continue luring the majority of LNG cargoes in competition with the other major demand centers. The dealer in commodities anticipates that Europe would emphasize supply security “through next winter and beyond.” How Europe will fare next winter will be largely determined by weather uncertainty and the EU’s capacity to compete with a potential rise in LNG demand in Asia. Early in December, commodity analysts Ole Hvalbye and Bjarne Schieldrop of SEB Bank stated that “two months of ‘buyer’s market’ with peak inventories, warm weather, a long backlog of LNG ships, and depressed TTF prices” were behind them. As the race is on to fill EU nat gas inventories to a satisfactory level by October 2023, there is a great amount of Q1 uncertainty ahead of us and at least 12 months of “seller’s market.”
