Warning signs of an energy crisis in the European Union are growing louder as the war between the United States and Iran drags on. EU natural gas storage has fallen to its lowest level in 15 years, raising concerns of a harsh winter ahead. Forecasts have resurfaced that the conflict could push oil to $120 a barrel, prompting expectations that the shock could spread to natural gas markets as well.
EU natural gas storage stood at 65.5% as of early this month, the lowest for this time of year in 15 years, according to European Gas Infrastructure Europe (GIE) data cited by the Financial Times on the 6th. Stored volumes totaled about 742 terawatt-hours as of the 1st, more than 20% below the five-year average.
For the EU, which imports all of its natural gas, storage serves as a form of insurance against supply shocks. The Financial Times noted that gas drawn from storage typically covers about one-third of the bloc's winter consumption. After Russia cut off pipeline gas supplies following its 2022 invasion of Ukraine, the European Commission in 2023 required member states to fill storage to 90% before each winter.
But as the U.S.-Iran war that broke out in February drove European gas prices higher, member states repeatedly delayed filling storage for the winter. Crucially, they took an optimistic view, expecting the war to end soon. The Wall Street Journal noted that the EU believed liquefied natural gas shipments through the Strait of Hormuz would resume shortly. In April, when a so-called two-week ceasefire between Washington and Tehran was reached and gas prices had jumped to as much as 70 euros per megawatt-hour, member states complained of the burden and the mandatory storage target was eased to 80%.
The Middle East conflict, however, has shown little sign of resolution, deepening concerns over energy supplies. Goldman Sachs said international oil prices could climb to $120 a barrel if maritime shipping disruptions in the Middle East worsen, according to Bloomberg on the same day. It said the supply shock in natural gas markets could be larger than in crude, potentially widening price gains.
Another factor is the diversion of U.S. LNG exports to Asia as prices there, including in South Korea, surged. After the EU halted Russian gas imports in the wake of the war in Ukraine, as much as 70% of U.S. LNG exports went to the bloc. That share fell below 50% in June, according to Reuters, when the Asian benchmark JKM price stood at about $17.33 per million British thermal units, above the European price of about $13.19. Warren Patterson, a strategist at ING Group, said competition between the EU and Asia to secure LNG will intensify as winter approaches.
Rushing to fill storage now could simply drive prices higher on a surge in demand. EU gas prices have risen about 75% over the past two months. On the 2nd, they touched 75.3 euros intraday, a three-year high. The EU Agency for the Cooperation of Energy Regulators estimated that filling storage would cost an additional 10 billion to 15 billion euros at a gas price of 50 euros per megawatt-hour. With prices currently in the 70-euro range, the added cost is likely to be considerably higher, leaving the bloc in a bind.
The European Commission maintains there is no immediate gas crisis. It argues that with time still left before winter sets in, storage can be filled at a pace that does not trigger a price spike. EU gas consumption has fallen about 17% in recent years on greater use of renewables and weaker industrial demand, another factor lowering the risk.
The EU also expects unusually warm weather driven by El Nino to reduce heating demand this winter, meaning gas consumption may come in lower than anticipated. One reason the bloc avoided a gas crunch immediately after the war in Ukraine broke out was the mild winter weather at the time.
The EU thus remains broadly optimistic. Lucie Boost, head of GIE, cautioned that any single variable, such as LNG supply disruptions, a cold snap or lower renewable output, could worsen the situation, adding that problems would grow if the bloc faced a combination of shocks.
