Gas woes: how much longer?

The growing gas shortage is a facet of the energy crisis that deserves special mention. While at the beginning it seemed that supply disruptions would only last for a couple of months, it’s now becoming clear that the lack of gas will remain a pressing issue in the coming winter and it’s unlikely to be resolved until 2024. Gas prices are holding at record highs (see Fig. 1) as intense heat waves continue to sweep across key markets, driven also by a fire at the Freeport LNG export terminal, which has led to the full shutdown of the facility at least until the end of the year, as well as by uncertainty about the completion date for scheduled maintenance works at the biggest pipeline carrying gas to Europe. While in the past consumers in Asia were paying more for natural gas than in Europe (e.g., the average premium in 2018-21 was $1.5 per million BTU), the situation is now reversed: gas in Europe is trading higher than in Asia, with the price differential being $10 per million BTU in July, up from around $3 in June.

The share of Asia Pacific in global LNG imports has declined, from 71% in 2021 to 50% in January-July 2022, while that of Europe, by contrast, has risen, from 22% to 33% in the wake of geopolitical tensions. Last month, however, LNG supplies to both Europe and Asia dropped 13% and 6%, respectively, from a month earlier (13% and 12% from the March levels). Though the EU continues to rely heavily on Russia, which supplies 30%-40% of its natural gas, in May it imported more US LNG than Russian pipeline gas for the first time ever[1] (see Fig. 2). At the same time, capacity utilization at regasification terminals in Europe fell from 65% in May to 63% in June as many countries gave a green light to coal-fired power (see our previous publication), while French companies are turning to fuel oil in fear that Russia will declare a permanent halt to its gas supplies.

European underground storage sites are just over 60% full (see Fig. 3), while the target set by the European Commission is at least 80%[2] by November. Looking at what’s happening in Europe, it’s obvious that, for now, the EU is unable to wean itself off Russian gas. With the world facing an unprecedented energy crisis, the IEA says Europeans should brace for a hard winter. According to Bloomberg,[3] the probability of an economic contraction in the euro area has increased from 30% to 45% over the past month, and this will have an impact on the global economy.