FT: Europe’s energy stability at risk amid global market shifts

Following two winters where the continent successfully managed energy needs despite disruptions caused by the Russia-Ukraine conflict, experts now warn that Europe’s energy landscape remains precarious.

The main issue is Europe's deepened connection to global energy markets, forced by the reduced reliance on Russian pipeline gas in favour of liquefied natural gas (LNG), Caliber.Az reports per Financial Times (FT).

“As it stands, Europe’s gas storages are full and the winter gas balance looks OK,” a trader noted. However, the unpredictable nature of energy markets means that any supply disruption could dramatically impact availability and prices.

LNG, accounting for 34% of Europe’s gas supply—up from 20% in 2021—has become a vital component of the continent’s energy mix. However, as LNG is traded globally and often directed toward the highest bidder, Europe must outbid other major consumers like Asia, especially when demand peaks during winter. This competition places upward pressure on prices and requires consistent strategic imports to secure supply.

Complicating this winter’s outlook is the potential expiry of the gas transit agreement between Ukraine and Russia, set to end on December 31. This contract supports roughly 5% of the EU’s annual gas imports and, without renewal, could tighten supplies at a critical time.

Florence Schmit, energy strategist at Rabobank, stated, “If we suddenly get a very cold winter at the same time as we lose the Russian gas flows, that will just be very bullish for gas prices.” She added that replacing lost volumes would likely require more LNG, as pipeline alternatives remain limited.

Despite Europe entering the winter with healthy storage levels, mild temperatures in the past two winters helped conserve stocks. Sindre Knutsson of Rystad Energy pointed out that current market expectations assume normal winter temperatures, which would naturally drive up gas demand compared to the milder past seasons. Analysts predict that under such a base-case scenario, Europe would finish the winter with 45-55% of its gas storage filled, a decrease from previous years’ 60%.

Potential challenges include limited new LNG supply entering the market due to delays in export facility start-ups. Commodity firm Kpler expects only 2.5 million tonnes of additional LNG this winter, markedly less than the 10 million tonnes seen last winter.

Geopolitical factors, such as escalating tensions in the Middle East that could disrupt the Strait of Hormuz—a crucial LNG transport route—pose further risks. This strait handles about 20% of global LNG traffic, underscoring Europe’s vulnerability to geopolitical shocks.

The International Energy Agency (IEA) recently highlighted the precarious nature of the global gas market, stating that “the global gas balance remains fragile as limited growth in LNG production is keeping supply tight.” The market remains sensitive to sudden changes in supply or demand.

Europe’s gas reserves at the end of winter are critical, influencing how much replenishment is needed for the following year. If reserves drop significantly, EU buyers may face fierce competition and higher prices to refill stocks for the 2025 season. Acer, the EU’s energy regulator, warned that exceeding typical winter withdrawals could pressure Europe to enhance its competitiveness, driving up wholesale prices.

Peter Thompson, director at consultancy Baringa, concluded that the real risk may not be a shortage of gas but the cost of securing it. “It’s ‘how much might we have to pay for that LNG?’” he remarked, reflecting concerns that while gas might be available, its affordability remains uncertain.

The crisis of 2022, when European gas prices soared to over €300 per megawatt hour, serves as a reminder of the high stakes involved. While Europe may avert a gas shortage this winter, sustaining comfortable reserves for the future without exacerbating price pressures could prove far more challenging.

By Aghakazim Guliyev