Vladimir Putin is losing the energy war

Suddenly, Vladimir Putin’s energy war is going just as well as his “special military operation”. I mean, not much. After causing fear and chaos by weaponizing gas supplies to Ukraine-backing countries, the Russian president is now far behind.

In the past month, natural gas prices have plummeted. After trading around €150 per megawatt hour ($48 per million British thermal units) in early December, they have fallen below €60/MWh ($19 per mmbtu) this week, helped by a period of weather unusually mild which has slowed the demand for heating. .

Prices are still high by historical standards. To be sure, household bills remain sore and the industry has taken a hit. But gas it has returned to a level that is almost manageable for most Western European economies.

Prices are about twice the level we once would have considered high in a normal winter, but they are no longer 10 times as high as they were last summer when Russia completely cut off its main gas pipeline to Europe.

Widespread shortages, once rightfully feared, have not materialized. By contrast, Europe’s gas storage facilities, the key measure of the continent’s ability to comfortably get through this winter and next, are full for the time of year.

Normally, at this time of winter, you would expect storage levels to be down to around 60% or less of capacity. Instead, they still stand at nearly 80 percent, with levels in Europe’s largest economy, Germany, closer to 90 percent.

It may not necessarily be wise to brighten spring temperatures in many European countries over the Christmas period, given what that tells us about a changeable climate. But you can forgive a wry smile from those who know enough Russian history to find it amusing that General Winter appears to have defected to support pro-Ukrainian countries.

There are still concerns about what will happen next. A prolonged cold snap in February or March could still start to reduce European storage, although weather forecasts, for now, look reasonably benign.

It is possible that Russia it will move to cut the small amount of pipeline that still reaches Europe through the Ukraine and Turkey. But most industry predictions now point to the spring and summer gas storage recharge season starting from a high base, allaying fears that winter 2023/24 could prove more challenging due to much lower Russian flows compared to the first half of last year. Europe is now better positioned to handle more Russian cuts.

A different threat is what happens to Chinese demand after it emerges from its Covid-19 lockdown policies. Right now, Chinese gas storage tanks are largely full after a period of depressed growth. But later this year, the industry expects Chinese demand for imported liquefied natural gas, the same seaborne cargoes Europe has largely relied on to replace Russian flows, to rise.

That may not be an immediate problem if Europe is starting to top up storage from a high base this spring. But things could still be a little tighter than comfortable when winter 2023/24 begins if Chinese demand picks up again.

Therefore, it would be foolish to rule out further price volatility. But Russia’s weaponized energy strategy is really on borrowed time. Last year, for Moscow, higher gas prices more than made up for the loss in volumes sold. That seems unlikely to be replicated. Western sanctions have also halved the price Moscow can fetch for its oil, hitting the Kremlin’s budget.

By 2024/25, more LNG will start to hit the global market, easing the supply situation and making extreme price spikes much less likely. While prices may not fully regress to the average of the last decade, the forward curve no longer predicts a return to the prices that threatened a deep and prolonged recession in Europe.

None of this suggests that Europe can afford to be complacent. Analysts say hesitantly that the only small risk to Europe’s gas balance in the coming months could be a rebound in industrial demand. Commitments made to expand renewable energy and other sources of clean power generation still need to be accelerated to eliminate the strategic weakness exploited by Putin.

Governments like Germany’s have shown they can move quickly in a crisis, setting up floating LNG terminals in a matter of months to open up alternatives to Russian gas. The same urgency must now be applied to longer-term solutions, be it offshore wind, hydrogen or nuclear, while accelerating the long-term process of reducing gas use for heating. That will be the only way to decisively declare victory in the energy war.

david.sheppard@ft.com
@Oilsheppard