ICIS VIEW: European gas markets resilient in face of Russian supply shock

LONDON (ICIS)–Europe has entered the winter season with wider supply margins than initially expected. Record LNG arrivals, stronger Norwegian pipeline flows and lower gas consumption all played a vital role in building up its resilience after Russia’s invasion of Ukraine in February and the unfolding energy crisis.

The likelihood that this resilience will hold over the rest of the winter season will largely depend on weather conditions, LNG supply that Europe will have to compete for with Asia, and countries’ efforts in reducing their own gas consumption to safeguard stock levels until the beginning of the injection season in 2023.

Although mild weather conditions have so far eased Europe’s supply margins in October and early November, cooler temperatures over the coming months could quickly threaten security of supply, especially if gas demand in Asia also ramps up and draws LNG away from the continent, as seen in January 2021.

SUPPLY RESILIENCE

Since the beginning of 2022 and especially after Russia’s invasion of Ukraine on 24 February, flows from Europe’s main supply source dropped to a record low and threatened supply margins ahead of the injections season.

A spike in LNG imports seen over the winter season and early spring – mainly driven by US LNG – and stronger Norwegian pipeline flows helped support storage injections from April to October across Europe.

This made it possible to rapidly refill heavily depleted gas storages. Stocks ended the winter season only 21% full, well below 2021 levels, but then rose to 95% full in early November, flipping even above storage levels recorded in 2020, when the pandemic limited overall gas demand and stocks remained historically high.

Alternatively, many countries in Europe reinforced their supply agreements with key LNG suppliers such as the United States, Qatar and Nigeria, as well as pipeline supply like in the case of Italy-Algeria partnership .

THE LNG FACTOR

LNG imports were key in replacing most of Russian pipeline gas supply. LNG sendout across European gas hubs rose to a record 116 billion cubic metres from January to October 2022, almost double compared to the same period last year.

This was mainly driven by an increase of US LNG imports in the supply mix of key LNG importers in Europe such as Spain and the UK – and particularly France, where US LNG volumes accounted for more than half of the total LNG imports in recent months.

LOWER DEMAND

As European gas prices assessed by ICIS spiked to record highs on the back of unprecedented supply tightness, gas demand from both factories and households declined. This is because higher prices provided an incentive to demand destruction.

It also had major implications on European macroeconomics as rising energy costs contributed to pressure industrial production across the Eurozone to below pre-pandemic levels across several months, Eurostat data showed.

Finally, in October and early November gas demand was further pressured by unseasonably warm temperatures. This helped supporting late storage injections and allowed European gas hubs to start the winter season with more comfortable supply margins.