Warmer-than-usual weather over the past few weeks has delayed the start of the heating season, cooling gas prices to €98 per megawatt-hour, from €205 three months ago. This is a cause for cautious optimism in dealing with the uncertain winter ahead.
Last week, the average gas storage fill level among member states was around 96%, a level that only covers 29% of annual consumption in the EU. Countries with low overall storage capacity, such as Belgium or Portugal, managed to fill their tanks completely, which made positive headlines but means they are storing 5-7% of their annual consumption.
The EU will probably be fine this Winter
There is a big caveat to the blue sea in this map. Although most EU member states have gas storage facilities on their territory, only two-thirds of the total capacity is located in five countries: Germany, Italy, France, the Netherlands and Austria.
Under a new regulation, countries without storage facilities should store 15% of their annual domestic gas consumption in stocks located in other Member States, thus having access to gas reserves stored in other Member States. This mechanism strengthens the security of the EU’s gas supplies and shares the financial burden of filling the EU’s storage capacity. Member States with lower storage capacity will cooperate with those who own larger facilities to secure their reserves.
“Even with no flow from Russia, we should be able to get through the winter; at least assuming that the current imports from the Netherlands and Norway are not diverted to central Europe and that the winter is not particularly harsh”, says Maurizio Mazziero, financial analyst and commodities expert, about the Italian situation, as sample.
USA replaced Russia as LNG Supplier
Where does all this supply come from? EU data shows Norway was the main supplier of gas in the first half of the year at 23% of supplies — or around 50% of Europe’s domestic gas volumes — followed by Algeria at 11%. The shortfall in Russian gas was mainly compensated by a sharp increase in imports of liquefied natural gas, especially from the US.
Between January and August 2022, US LNG imports totaled nearly 40 billion cubic meters, nearly double the total figure for 2021. In fact, the US became the world’s largest LNG exporter in 2022 .
What Happens to Supply in 2023?
Let’s say that the weather will be mild and Europe will go through this winter with its current stores; what about next year? When demand declines, the race to refill begins again. Will these new suppliers be ready then?
Speaking at the Abu Dhabi International Petroleum Exhibition & Conference last week, Claudio Descalzi, CEO of ENI (ENI), said that the fall in the price of gas in Europe in recent months may not last: It will be much more difficult to restock winter of next year. “In 2023 there will be big problems because there will be no Russian gas. In that context, for example, it will be necessary for Italy to double the flow of gas from Algeria.”
At the same time, we are likely to see US LNG continue to make its way to Europe, but this does not rule out further supply bottlenecks in the near future. European customers will have to wait a few years for additional supplies to become available, simply because the infrastructure needs time to build.
What can Europe expect next year?
Although TTF prices are about one-third of their August peak, higher momentum has returned. That’s despite mild weather, high levels of storage and EU policy discussions calling for more measures to ease high energy prices.
Note: The Title Transfer Facility, commonly known as TTF, is a virtual trading point for natural gas in the Netherlands. This trading point provides a facility for some traders in the Netherlands to trade futures, physical and exchange trades.
“We think the market is now looking further from a soft October to the upcoming winter weather and a very tight supply picture that could be more”, says Christopher Louney, commodity strategist at RBC Capital Markets. “While most expect Europe to get through this winter, it is likely to be a painful one and the economic cost of high gas prices on the EU should not be underestimated. At the very least, today’s natural gas imbalance and demand problems are not going away before next winter, and it could be more challenging year after year if storage is difficult to fill.”
As Nord Stream 1 is expected to remain offline after the September explosions, Europe will have to rely heavily on global LNG imports for its immediate energy needs. “Competition for LNG has been intense this summer as countries around the world prepare for winter, which has added risk to the LNG spot price,” says Shikha Chaturvedi, Global Head of Natural Gas and Liquids Strategy Natural Gas at JP Morgan, in its latest. attitude.
Higher prices also attracted a fleet of LNG imports to Europe, allowing countries to bolster their natural gas reserves ahead of winter. “The price has done much of the upswing to help replenish storage, not only by reducing demand, but also by attracting a lot of LNG shipments. Northwest European natural gas storage has already exceeded 95% full,” says Chaturvedi. “The price weakness currently seen in the TTF market is likely due to storage congestion, and the relatively warm start to the winter heating season so far.”
Looking ahead, the energy shortage is expected to last through 2023. “Even if the North West European natural gas market makes it through the winter withdrawal season with 35% in storage, it does not change that Europe will have difficulty finding sufficient new supply find. to reach 90% full by October 2023,” asserts the strategist. “Further reductions in flows from Russia, particularly through Ukraine, would make replenishing storage much more difficult next summer.”
Should Europe Avoid TTF, But Can It?
The massive influx of overseas LNG and the pressure on Russian pipeline supplies means the TTF no longer reflects supply and demand in international gas markets, according to the EU. With this in mind, the Bloc plans to create a new transaction-based benchmark for imported gas. That new benchmark is intended to better reflect LNG supplies by using an administrator that collects transaction data, rather than basing prices solely on real transactions.
The plan is so controversial, that even a staff member at the EU agency ACER — the organization tasked with building the new benchmark — is publicly expressing doubts.
In an interview with the Financial Times, Iztok Zlatar, ACER’s head of market data analytics, said that “it is a demanding task operationally”, as many LNG markets are tailor-made and privately negotiated, and that ACER “cannot tell” whether the there is a new benchmark. accepted by the market.