Europe Is Already Facing Its Next Energy Crisis

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(Bloomberg) — Rapidly depleting gas reserves and looming supply cuts from Moscow have the makings of a fresh energy crisis for Europe, which is still reeling from extreme shocks two years ago.

Escalating tensions in Ukraine have contributed to about a 45% surge gas prices this year. While levels are still far below 2022 records, they are high enough to risk deepening a cost-of-living crisis for households and intensifying competitive pressure on strapped manufacturers.

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Gas storage is a lifeline in colder times but inventories this year are dwindling quickly after freezing temperatures increase heating demand and drier air demand more power generation.

In the two years since President Vladimir Putin took power, Europe is struggling to protect its energy system. The strong market reflects the continent’s challenge to completely wean itself off Russian oil. The situation is set to worsen with gas deliveries that helped fill reserves by 2024 likely to be unavailable next year, further tightening prices.

“We still have problems with gas availability,” said Markus Krebber, CEO of RWE AG, at a conference on Friday. “If we really want to be independent without Russian gas we need a lot of imported energy and we will probably see this again in the winter because gas storage facilities are running out quickly as we start to get colder in winter.”

Russia’s war against Ukraine is escalating, with both sides launching missile attacks this week in an attempt to gain leverage before Donald Trump returns to the White House. Due to growing tensions, the US sanctioned Gazprombank, the last major financial institution exempt from fines and the manager of Russian gas payments.

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The sanctions aim to reduce the Kremlin’s income from energy exports, but they also increase the risk of natural gas freezes still flowing to several central European countries.

Although Europe has reduced its reliance on Russia, the loss of one of its last remaining pipeline gas routes could put more pressure on the gas market and send global prices soaring, according to Energy Aspects analysts.

Europe was already looking at a possible end to the flow of Russian gas through Ukraine when the transit agreement expires at the end of the year. The sanctions mean gas could stop flowing before then, with Hungary warning that its energy security is at risk.

The prices reflect the potential loss of the remaining cheap Russian flow, delays in additional supplies of liquefied natural gas from the US, and a cold winter.

In another rare sign of pressure on the system, prices in the summer, when gas should be cheap enough to fill storage, are more expensive than the following winter. That suggests that energy costs will remain high for a long time, and the lower storage levels get this winter, the more difficult the task of filling reserves becomes.

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At the height of the energy crisis in 2022, Germany ordered an immediate compulsory purchase of gas to keep it on the world market at record prices. To try to recover some of the additional costs, Berlin introduced a gas storage tax, which is paid by traders or delivery services in Germany. It has been widely criticized as it increases the cost of obtaining LNG in landlocked countries such as Austria, Slovakia and the Czech Republic.

“This is starting to resemble a situation in 2022 where the EU bought gas at any price,” said Arne Lohmann Rasmussen, senior analyst at Global Risk Management in Copenhagen. “Next year, this could happen during a year of strong Asian demand.”

Fatih Birol, director general of the International Energy Agency, is sounding the alarm. He warned that Europe needs sufficient inventory later this winter if the flow of Russian gas through Ukraine ends in Jan. 1 with the expiration of the agreement between Moscow and Kyiv.

In Germany, where many factories had to close or halt production due to high energy costs, the rapid withdrawal of storage sent alarming signs that the crisis in Europe’s largest economy could continue for a third year in a row.

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“Once again, the economy that uses electricity, led by Germany, will suffer greatly, hurting the economy that is already plagued by problems in the automotive, chemical and machinery sectors,” said Ole Hansen, head of commodity strategy at Saxo Bank AS.

Germany has been reeling since the energy crisis and rising inflation could fuel voter frustration ahead of a snap election in February.

In the winter of 2022, Europe avoided a deficit due to a mild winter. This year, the risk of energy balance is low. Higher prices relative to Asia mean LNG shipments are coming. But a cold winter elsewhere could create more competition for goods and drive up prices, which could cause problems for the region.

“There is a big risk that Europe’s good luck, in terms of mild weather, may run out this coming winter,” said Saxo Bank’s Hansen. “In other words we are forced to rely on LNG exports and the need to remain competitive with Asia.”

—Courtesy of Eva Brendel.

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