The EU is poised to start November with the second highest level of natural gas in storage it has ever had. EU gas inventories should reach 1,060 Twhs, or over 95% of working capacity, by November 1st. This November 1st level was exceeded only once before (97% on 1 November 2019, according to AGSI figures), and it far surpasses the EU target of 80%.
This achievement has come at a very heavy cost for Europe’s households, businesses and other energy consumers. And it has required a fundamental transformation of Europe’s natural gas supply-demand balance. The factors underlying this shift are important to examine and understand. For not only have they enabled Europe to enter the winter with a very comfortable level of gas stocks, but they are likely to drive European energy security going forward.
Russia has coordinated its late-February invasion of Ukraine with a steep ramp-down of pipeline gas exports to Europe, to a trickle that now barely exceeds 20% of last year’s flows. This effective gas embargo was intended to inflict economic damage and sow political discord within Europe, that would pressure it to withdraw support from Ukraine. Initial assessments of Europe’s ability to withstand this economic assault were rather bleak, with widespread warnings of shortages and forced rationing, making Europeans struggle to heat their homes and keep the lights on.
It is therefore quite remarkable that Europe has managed to not only match but exceed last year’s gas inventory builds for the spring and summer period. From April through October, Europe (including the UK, Turkey and Ukraine) added a total of 55.9 million tonnes (mt) to its total natural gas and LNG stocks, as compared to just 37.1 mt during the same period last year (see Figure 1). This was in spite of a -38.8 mt reduction in pipeline gas from Russia. This Russian gas was “replaced” primarily through demand destruction, which totaled 32.9 mt, while a 27 mt increase in LNG imports covered the remaining deficit, and quite a bit more.
Figure 1. Europe Net Inventory Builds for Apr-Oct 2022 vs. 2021 & Y-o-Y Changes in S/D Components
Given its primary importance, demand destruction has been one of our key areas of focus throughout the year. During the spring, we observed:
Given the even higher TTF gas prices seen more recently, and assuming that the price elasticity of European gas demand continues at the levels seen since the winter, we expect the EU to meet and exceed its energy savings targets.How Price Elastic is European Gas Demand? (4 May 2022)
By mid-summer, our conclusion was:
We therefore have reason to expect that gas demand destruction will continue to make a substantial contribution to Europe’s goal of balancing its gas market while greatly reducing or eliminating Russian gas imports. However, this demand destruction comes at a price, quite literally.How Price Elastic is European Gas Demand (Part II)? (10 August 2022)
Our projections came true only because European gas prices maintained historically high levels throughout much of the year. Now that prices are abating, and given the pursuit of price control policies, demand destruction should lessen.
Similarly, lower prices will affect Europe’s ability to sustain its record high levels of LNG imports, the other key factor in the European gas market’s rebalancing. European gas prices have maintained a premium to Asian LNG prices throughout the year. And European buyers’ success in outbidding Asia for limited available LNG cargoes will depend on how that price spread evolves.
We look forward to tackling these dynamics and sharing our projections for the coming winter and beyond in follow-up articles to this piece. You will be able to find them here in the Capra Energy Journal.