Last gas: EU prepares for winter with extremely low fuel reserves
Gas reserves in Europe's underground storage facilities are rapidly declining. According to Gas Infrastructure Europe, as of August 10, they are 59.1% full, which is 12.4% lower than a year earlier. The situation is affected by interruptions in LNG supplies through the Strait of Hormuz and an increase in electricity consumption due to the heat wave. The German Ministry of Economy told Izvestia that the German authorities do not plan to purchase gas to replenish storage facilities, as this will further reduce supply on the market and push prices up. Private companies are also in no hurry to actively increase stocks. What opportunities Europe has and how the situation will affect the cost of fuel can be found in the Izvestia article.
Why is the pace of gas purchases decreasing
By August 10, gas reserves in European UGS facilities reached 59.1% of the total storage capacity, but this is 12.4% lower than last year's level, according to data from the Association of European infrastructure Operators Gas Infrastructure Europe (GIE).
As Gazprom reported on August 8, citing GIE, there is less fuel in European storage facilities than on this date in the critically important injection seasons of 2018 and 2021, when Europe was in dire need of filling UGS depopulated by severe frosts. The Russian company noted that the shortage of gas in underground storage facilities poses serious risks to the reliable supply of European consumers during the cold weather.
The reason for the slow injection of fuel into storage facilities remains, first of all, interruptions in the supply of LNG through the Strait of Hormuz. Under normal conditions, about 20% of the global LNG supply passes through it, so the supply disruption has noticeably tightened the global balance, said Ivan Timonin, senior manager of the Implementation consulting company. Restrictions in the Middle East stopped the supply of liquefied natural gas from Qatar, which accounted for a significant share of European imports.
Additionally, the situation was worsened by the abnormal heat wave that covered Europe this summer. Government agencies, enterprises and the general population were forced to increase energy consumption. At the same time, energy production was decreasing — on August 11, due to high temperatures, the capacity of French nuclear power plants was limited, and wind energy production in Germany was 60% below the seasonal norm. This forced Europeans to actively use gas-fired power plants, which led to an earlier increase in fuel demand.
As a result, at the end of July, European gas cost almost twice as much as before the outbreak of the Middle East crisis. By the end of the month, stock prices in Europe exceeded $700 per 1,000 cubic meters, and on August 11 they remained around this level, according to data from the London ICE exchange.
The pace of gas injection into storage facilities has decreased, as current prices have turned out to be too high for European energy companies, said Igor Yushkov, a leading analyst at the National Energy Security Fund. According to him, operators are afraid to buy fuel at current prices, because in winter they may not be able to sell it to consumers without loss. According to the expert, the situation in Europe this winter will also be affected by a complete ban on the import of Russian LNG into the European Union under long-term contracts, which will enter into force on January 1, 2027.
At the same time, the EU has set the mandatory rate of filling UGS by the beginning of the heating season at 80%. If necessary, this limit can be revised, as it has already happened before. Nevertheless, objectively, for the winter heating period to pass, the level of storage occupancy should be close to this figure, said Dmitry Scriabin, portfolio manager of Alfa-Capital Management Company.
Germany plays a significant role for the European energy market today: the country hosts almost 20% of the EU's gas storage facilities with the largest storage capacity in the union. In addition, Germany is an important transit market. Currently, German underground storage facilities are only 48.5% full.
If Germany fails to reach the target, the resulting deficit could affect the entire European Union. At the same time, Berlin does not plan to conduct public gas purchases. The German Ministry of Economy told Izvestia that private companies and traders should provide the necessary volumes.
— Filling the storage facilities with the state would further reduce the supply on the gas market and would further push prices up. This could even worsen the supply situation in the coming months," the ministry said.
The German Ministry of Economy noted that the development of LNG supplies has reduced the country's dependence on reserves in storage facilities. The authorities expect that private companies will be able to independently form the necessary volumes by winter, and the deficit will be compensated, among other things, by pipeline gas and LNG.
The problem is that private companies are in no hurry to replenish their storage facilities. As Aurora Energy Research analysts have noted, there are no financial incentives for this right now. The European gas market is in a state of so-called backwardation: the cost of gas supplied in the near future is higher than the prices under contracts for the upcoming winter. In such conditions, it is economically unprofitable for companies to buy expensive fuel, pay for its storage, and then use or sell it cheaper.
What ways does Europe have to solve the problem?
According to Ivan Timonin, the European Union's stated injection rate of 80% is achievable, but the figure of 70-75% looks more realistic in the current conditions.
If the winter turns out to be harsh, European countries may run out of gas reserves. Then they will have to urgently purchase additional volumes at higher prices or, as a last resort, limit supplies to consumers. Another option is to switch to coal and fuel oil, but this will be unprofitable in terms of prices and will negatively affect the environment, Dmitry Scriabin believes.
Insufficient filling of UGS facilities does not mean a shortage of gas, but it significantly reduces the safety margin: Europe will be more dependent on LNG imports in winter. Additional pipeline supplies are possible from Norway, Algeria and Azerbaijan, and LNG supplies from the United States, but their overall potential is limited, explains Ivan Timonin. If the situation in the Strait of Hormuz normalizes, supplies from Qatar may resume. However, in any case, the EU will have to compete with China for additional volumes, which will affect the price increase, Dmitry Scriabin believes.
If Europe does not increase fuel reserves in its storage facilities by winter and supplies of Middle Eastern LNG do not recover, the need to compete more actively with Asia for additional shipments may lead to an increase in prices to $1,000 per 1,000 cubic meters, Ivan Timonin believes. Dmitry Scriabin shares the same opinion. However, demand will be strongly influenced by the weather conditions of the upcoming winter, he added.
According to Kirill Rodionov, an independent energy expert, European gas prices may indeed be higher this winter than last year, but the cost of natural gas will not rise to the levels of 2022— a historical record of $3,892 per thousand cubic meters amid a sharp reduction in supplies from Russia.
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