Untested Europe Braces for Winter

Will 90% full gas storage be enough for Europe?

Mobius Energy Shots

European gas inventories exceeded 90% of their capacity this week, over two months ahead of the bloc’s November 1st target. While headline storage figures suggest 2H24-2025 supply-side uncertainty should be easing, TTF price action communicates a different story. Markets are keenly aware that the EU has yet to face a challenging winter since Russia’s invasion of Ukraine. On three fronts, supply-side risks could swiftly erode Europe’s energy security by the end of winter 24-’25.

  • Key Takeaway: Significant upside price skew for European gas prices through winter ‘24-’25, with follow-on effects extending into Asian import markets and long-term Euro Area economic decline.

On This Energy Shots

Untested Europe Braces for Winter

European natural gas inventories exceeded 90% of their capacity this week, more than two months ahead of the bloc’s November 1st target for that level.

As of August 21, storage utilization for the European Union’s four largest gas-consuming members — Germany, Italy, France, and the Netherlands — were 94%, 92%, 87%, and 88% full, respectively.

While Europe’s headline storage data suggests 2H24 uncertainty should be easing, Dutch TTF price action indicates markets are aware of several 2H24 developments that could rapidly erode the EU’s winter ‘24-’25 energy security.

As shown below, rising European natural gas storage utilization coincides with a steepening backwardation of the Dutch TTF forward curve, with the Jan ‘25 TTF contract ($/MMBTU) gaining 11.7% M/M.

Three Risks Behind TTF Upside Price Action

Three significant risks to winter ‘24-’25 supply scarcity warrant monitoring:

  • Weather: Europe’s first cold winter since the beginning of the Russia-Ukraine conflict;

  • Ukraine: Limited appetite for storing excess gas in Ukrainian facilities; Ukraine’s incursion into Russia, conflict near the Urengoy-Pomary-Uzhgorod pipeline; Transit agreement expires at the end of 2024;

  • Norway: Norway’s new role as Europe’s top gas supplier magnifies risks from unplanned extensions to maintenance season;

Europe’s First Post-Russia-Ukraine Winter Test?

Before launching its invasion of Ukraine, Russia supplied approximately 40% of European natural gas imports. In the two years since that invasion, Europe’s scramble to find alternative supplies has benefitted from two of the bloc’s mildest winters in recent history.

Over the last four October-March heating seasons, only three of 24 months have had heating degree day (HDD) counts greater than the 45YR 50th percentile. Seventeen of the last 18 heating season months have posted bottom-50th percentile HDD counts.

As many readers are likely aware, last year’s mild winter left European gas inventories 59% full, or their highest post-heating season level on record.

Despite starting 2024’s injection season with gas storage at all-time highs, slower summer injection rates ensured the EU hit its 90% target a week later than in 2023.

While healthy storage has helped allay some fears of swift supply-side shocks, Mother Nature remains the bloc’s primary risk factor for upside price action through winter ‘24-’25. An example of this correlation is visible below.

Should Europe face its first real winter without stable Russian supplies, weather-driven consumption will likely 1) rapidly erase excess EU gas stocks and 2) expose the EU’s supply-side bottlenecks, including overreliance on a small number of exporters and limited investment in regional backstops like spare Ukrainian storage.

Ukraine’s Storage and Pipeline Risks

Extensive Russian attacks on Ukrainian energy infrastructure have limited EU-based firms’ appetite for storing excess gas in Ukrainian facilities (Europe’s largest).

Last year, Ukraine offered approximately 353 bcf of additional storage capacity, roughly 20% of which was filled by European entities ahead of winter ‘23-’24.

This year, European firms have injected approximately a tenth of that amount, fearing Russian attacks would limit their ability to withdraw supplies when needed. As shown below, Ukrainian gas storage utilization trails 2022 and 2023 levels by roughly 4.4% (54 bcf) and 7.4% (80 bcf), respectively.

Ukraine’s limited storage utilization magnifies the supply-side fears stemming from the country’s latest incursion into Russian territory near the border town of Sudzha.

As highlighted previously, the Sudzha station is one of Russia’s two remaining entry points into European markets, supplying approximately 1.48 bcfd (42 MCM/d) or 5% of European gas consumption at 2023 levels.

While Gazprom’s Urengoy-Pomary-Uzhgorod pipeline primarily supplies gas for markets like Hungary, Austria, and Slovakia, disrupted flows could indirectly tighten supplies for the broader European region ahead of Winter ‘24-’25.

Though we discount the near-term conflict-related risks of disrupted flows through the Urengoy-Pomary-Uzhgorod pipeline, readers should note the long-term uncertainty stemming from the pipeline’s expiring transit agreement at the end of 2024. As of this writing, European and Ukrainian officials have not identified alternative gas supplies for 2025+.

Should the upcoming European winter erase the EU’s existing storage surplus more quickly than anticipated, buyers will have limited spare supplies in Ukrainian storage and limited prospects for new flows by early 2025. As discussed below, this magnifies Europe’s exposure to a small number of gas exporters — the largest of which is entering maintenance season with a track record of material unplanned outage extensions.

Norway’s Maintenance Season

After Russia invaded Ukraine, Norwegian exporters rapidly found a home in Europe’s gas market, supplying over 30% of EU gas imports in 2023.

Norway’s annual maintenance season brings these flows into question, as European buyers will lose gas flows equivalent to the daily demand of France until the middle of September if planned outages unfold as scheduled.

Frequent changes to Norway’s maintenance schedule have entrenched uncertainty in TTF price action. Consequences of unplanned outages in Europe’s gas supplies are evident in market reactions as recently as June when a small crack in a pipe on Norway’s Sleipner R platform sent Dutch TTF 13% higher in three days.

Likewise, last year’s extended outage at Norway’s Nyhamna gas processing plant sent nearby Dutch TTF futures over 17% higher D/D despite unseasonably high gas inventories — akin to levels seen this year.

Takeaways for Europe’s Skewed Energy Risks

Front-month Dutch TTF futures are trading approximately 89% below their 2022 $110/MMBTU peaks. Still, stripping TTF price performance between 2021 and 2023 shows current price levels remain historically rich at the 10-YR 100th percentile relative to 2010-2020, highlighting the entrenched supply-side uncertainty for European energy markets.

This uncertainty has likely already cemented European deindustrialization trends, though the near-term outlook retains several risks that could accelerate energy-related economic turmoil.

While European gas inventories reached their 90% target ahead of schedule, the EU’s post-Russia energy security has yet to face a real test from Mother Nature or extended unplanned supply outages.

Any deviation from ‘normal’ invites significant price volatility risks that will likely extend beyond the EU as buyers are forced to compete with Asia for LNG cargoes. For U.S. industry stakeholders, Europe’s three-part risk premium translates into a near-term LNG price outlook with a material upside skew.

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