Europe’s energy crisis is just beginning

Despite successfully filling its gas storage before winter this year, Europe’s energy crisis is far from over. The situation for Europe could, in fact, be worse next winter when gas supplies from Russian pipelines are minimal, at best.

European households and businesses have already experienced an increase in total energy costs of $1.06 trillion (1 trillion euros), according to Dear by the European economic think-tank Bruegel published by the International Monetary Fund (IMF). According to Bruegel analysts, if Europe’s governments do nothing more than offer financial support and cover up price increases, this sum would represent a whopping 6% of the EU’s annual GDP.

“Massive government support could delay adjustment to a new price equilibrium and create the need for even more support,” Bruegel’s experts say.

Instead, the EU needs a “big deal” to encourage savings and increase supply at the same time.

The next 12 to 24 months will determine whether Europe will be able to cope with the energy crisis without resorting to compulsory rationing or losing too much industrial competitiveness.

Europe’s energy systems were already put to the first real test this month in the midst of an arctic blast that swept through most of northwestern Europe, bringing freezing temperatures, snow to the UK and dismal winds to Germany.

Natural gas storage sites in the EU began to drain, with storage in 84% as of December 17, according to Gas Infrastructure Europe. Inventories are higher than at this time last year, but the real test for Europe will come next year when it will have to adequately refill gas storage sites to meet winter 2023/2024 demand.

This is where planning gets trickier, depending on how low inventories are after this winter and whether the EU has the capacity to ship continued record volumes of LNG and continue to outpace Asia, especially if demand in China picks up. after a strict reopening of Covid curbs

With lower gas consumption and not much Russian gas flowing through pipelines, the EU has continued to reduce its dependence on Russia, from around 40% of imported gas supply before the Russian invasion of Ukraine. to less than 9%according to EU figures from September.

However, the significant drop in Russian gas supply this year occurred only in June.

Before the winter of 2023/2024, the gas supply gap in Europe will be much larger without Russian gas. Europe will not import much Russian gas, or any at all if Russia cuts deliveries via the only remaining operational link via Ukraine and TurkStream, compared with relatively stable imports from Russia in the first half of this year before Moscow started to gradually reduce the volumes. through Nord Stream in June and then closed the pipeline in early September.

According to one recent report According to the IEA, if Russian gas supply falls to zero and Chinese LNG demand recovers to 2021 levels, the EU could have a gas supply-demand gap of 27 billion cubic meters in 2023. .

With gas deliveries from Russian pipelines falling, Europe will need “huge volumes” of LNG next year, commodities trader Trafigura said earlier this month.

“Looking ahead, we expect the gas and LNG markets to remain volatile,” Trafigura said in its annual report for the year to September 30.

“While Europe should avoid a blackout this winter by drawing on inventories and reducing demand, it will need to import large volumes of LNG in 2023 given the massive reduction in flows from Russia,” Trafigura said.

Natural gas prices in Europe will need to remain high for the continent to continue to attract the majority of LNG cargoes in competition with the other key demand hubs, according to Trafigura. The commodities trader expects Europe to prioritize security of supply “through next winter and beyond.”

Huge uncertainties with the weather and the EU’s ability to compete with a potential increase in LNG demand in Asia will determine how Europe fare next winter.

“Behind us now are two months of ‘buyer’s market’ with peak inventories, hot weather, a long line of LNG ships and depressed TTF prices,” commodity analysts Ole Hvalbye and Bjarne Schieldrop of SEB Bank said in early December.

“Ahead of us is the great uncertainty of the first quarter and at least 12 months of ‘seller’s market’ as the race progresses to fill EU natural gas inventories to a satisfactory level by October 2023.”

By Tsvetana Paraskova for Oilprice.com

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