(Bloomberg) — Russian President Vladimir Putin’s plans to squeeze Europe by weaponizing energy look to be fizzling at least for now.
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Mild weather, a wider array of suppliers and efforts to reduce demand are helping, with gas reserves still nearly full and prices tumbling to pre-war levels. After the sharp turnaround over the past month, Europe is likely already through the worst of the crisis.
The combination of conditions — including China’s Covid woes blunting competition for LNG cargoes — would take the edge off inflation, stabilize Europe’s economic outlook and leave the Kremlin with less leverage over Ukraine’s allies, if they persist.
While a cold snap or delivery disruptions could still throw energy markets into disarray, optimism is growing that Europe can now make it through this winter and next.
“The danger of a complete economic meltdown, a core meltdown of European industry, has — as far as we can see — been averted,” German Economy Minister Robert Habeck, a key architect of the country’s response to the energy crisis, said during a trip to Norway, which has taken Russia’s place as the country’s biggest gas supplier.
The crisis, triggered by Russia’s invasion of Ukraine last February, has already cost Europe close to $1 trillion from surging energy prices. Governments have responded with more than $700 billion in aid to help companies and consumers absorb the blow. They also scrambled to unwind their reliance on Russian energy, especially natural gas.
The European Union is no longer importing coal and crude oil from Russia and gas deliveries have been significantly curtailed. The bloc has filled some of the gap by increasing supplies from Norway and shipments of liquefied natural gas from Qatar, the US and other producers.
In Germany, storage facilities are about 91% full, compared with 54% a year ago, when Russia had already been emptying facilities it controlled. Chancellor Olaf Scholz’s government has since nationalized Gazprom PJSC’s local units and has spent billions of euros filling reserves.
Energy-saving measures from industry and households as well as the warmest January temperatures in decades have helped preserve that cushion.
“We are very optimistic, which we weren’t really back in the fall,” Klaus Mueller, head of Germany’s network regulator, said in an interview with public broadcaster ARD on Friday. “The more gas we have in storage facilities at the beginning of the year, the less stress and cost we will face in filling them again for next winter.”
Benchmark gas prices have fallen to a fifth of records set in August, and despite concerns that cheaper rates could stoke demand, usage is still declining — a silver lining of the weak economy. European consumption is expected to be some 16% below five-year average levels throughout 2023, Morgan Stanley said in a report.
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Favorable conditions and the expansion of renewable capacity is also helping. Higher wind and solar generation will help slash gas-fired power generation in 10 of Europe’s largest power markets by 39% this year, according to S&P Global.
The dynamic has shifted to such an extent that there’s now too much LNG arriving, according to Morgan Stanley. Deliveries set a fresh record in December, and the trend is likely to continue.
Germany, once the biggest buyer of Russian gas, is opening three terminals this winter, and Europe’s largest economy expects its new LNG facilities to cover about a third of its previous requirements. Steady supplies from non-Russian sources are likely to keep market prices from surging to last year’s peaks.
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“The fact that Europe managed to fill up its storage sites has really created a buffer for prices for the upcoming winter,” said Giacomo Masato, lead analyst and senior meteorologist at Italy-based energy company Illumia SpA. “The expectations shifted as the region started to have ample supplies.”
Refilling reserves could be less dramatic after this winter. Morgan Stanley and consultancy Wood Mackenzie Ltd. expect storage sites about half full this spring if the weather stays mild. That would be double last year’s levels.
Despite the positive developments, prices are still higher than historical averages and risks remain. Russian pipeline gas imports this year will be just a fifth of usual levels — about 27 billion cubic meters — and the Kremlin could cut them completely.
That’s “a massive reduction for a market that was consuming 400 bcm in 2021,” said Anne-Sophie Corbeau, a researcher at Columbia University’s Center on Global Energy Policy.
LNG therefore will be critical to securing enough supplies for next winter, and Europe will need to remain alert. A rebound in China’s economy could stoke competition, with supplies tight until more capacity becomes available in 2025. Russia also has the ability to cause disruption in the market as one of Europe’s top-three suppliers of the super-chilled fuel.
Still, the chances of a large rebound in Chinese LNG demand is evaporating, as the nation turns to more affordable fuel options, like coal, pipeline gas and domestic production. In fact, China may not even need any spot LNG shipments this year, according to CICC Research.
The climate crisis has contributed to a lack of demand for heating so far this winter and increasingly volatile weather patterns may still trigger blasts of cold, such as the recent arctic weather that swept across the US. Prolonged freezing temperatures can deplete storage sites to 20% capacity, according to Wood Mackenzie.
To ensure smooth stockpiling in the summer, a lot of factors have to align, including solid electricity supply from wind, nuclear and hydro generators, stable LNG flows and continued energy savings, Corbeau said.
“Europe might be in a better position compared to previously feared, but it is not out of the woods yet,” Wood Mackenzie said by email.
–With assistance from Iain Rogers and Stephen Stapczynski.
(Updates with details about China’s LNG demand outlook in the 20th paragraph.)
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