Europe's calculation, which delayed purchases of winter natural gas on the expectation that the war between the United States and Iran would end early, has gone awry. Hopes were that prices would fall as Qatar's liquefied natural gas (LNG) supplies normalized after the war, but the war has entered its seventh month. Analysts say the decision to postpone gas purchases in anticipation of an early end to the war and lower prices is coming back as an energy burden for Europe heading into winter.
On the 3rd (local time), according to the Financial Times (FT), the Wall Street Journal (WSJ) and others, the European Union's (EU) natural gas storage facilities are about 65.6% full. It is the lowest level for the same period since the European Gas Infrastructure (GIE) began compiling related statistics 15 years ago. Typically, Europe covers about one-third of its winter gas consumption with gas stored in storage facilities.
Europe is sensitive about gas storage rates ahead of winter because of the energy crisis it experienced when Russia invaded Ukraine. When an energy crisis erupted in 2022 due to Russia's invasion of Ukraine and disruptions in supplies of Russian gas, the EU introduced gas storage rules in June of the same year. In the first year, 2022, facilities were required to be 80% full by Nov. 1, and from 2023 the target was raised to 90%.
◇ Europe delayed gas purchases expecting prices to fall when the war ends
However, this spring the European Commission proposed lowering the storage target to 80% by using flexibility provisions in the relevant rules so that member states could adjust the timing of purchases as gas prices surged. In particular, U.S. President Donald Trump also said multiple times that the United States and Iran were close to an agreement, boosting expectations in Europe that LNG supplies would recover and prices would fall when the war ends.
But contrary to expectations, the war has dragged on, and attacks on merchant ships, including oil tankers passing through the Strait of Hormuz, have continued. According to ship-tracking firm Kpler, crude carriers are transiting the Strait of Hormuz, but only a small number of LNG carriers have exited the strait. Of the 14 production lines at Qatar's Ras Laffan LNG facility, only six are reported to be operating.
On top of that, as disruptions to LNG supplies in the Middle East continue, gas prices have also surged. According to the FT, European natural gas prices have risen more than 75% over the past two months, hitting the highest level in three years this week. With gas prices on an upswing since the summer showing no sign of easing, European energy corporations are also facing a bigger burden to fill storage with gas.
The problem is that there is not much time left to stockpile gas ahead of winter. Storage facilities have physical limits on the amount of gas that can be injected over a given period, making it difficult to quickly raise storage rates even if the necessary volumes are secured. Huibert Vigeveno, CEO of European energy company MET Group, told the FT to the effect that "what matters in practical terms is not how much gas you can secure, but how much gas you can inject into storage facilities." The gas storage industries in Germany and the Netherlands also predicted it would be difficult to meet their national gas storage targets of 70% and 80%, respectively.
◇ Europe scrambles late to secure gas, competing with Asia for LNG
In this situation, as European corporations belatedly move to secure winter gas volumes, competition in the international LNG market is intensifying. According to the WSJ, European buyers are competing not only with other European corporations but also with Asian buyers to secure limited volumes.
Experts, however, say the low gas storage rate is unlikely to immediately lead to energy shortages in Europe. The European Commission also says it is not a situation that warrants concern about gas supplies right now. That is because Europe's gas consumption has fallen 17% in recent years due to the expansion of renewable energy use and a decline in industrial demand. In addition, due to El Niño, European temperatures are expected to be higher than average this winter.
But there are also warnings that the situation could change if a colder-than-expected winter, disruptions to LNG supplies in the Middle East, and a drop in renewable power generation occur simultaneously. Lucy Boost, head of GIE, said, "If we face a combination of shocks, it will be a problem." Last month, on the view that current preparations are insufficient if a harsh winter hits, the Dutch government took the unusual step of deciding to provide €1 billion (about 1.57 trillion won) so that state-run energy company Energie Beheer Nederland (EBN) can stockpile gas this year and next. It is in the same vein.
For Europe, which had delayed purchasing winter gas in hopes of an early end to the war and lower prices, the burden has grown not of an immediate gas shortage but of having to pay higher prices later to fill storage. The timing of a normalization of LNG supplies in the Middle East and winter temperatures are expected to be key variables that will determine the direction of European gas prices.