A 2021 repeat?

Europe faces another geopolitically induced spate similar to the 2021 crisis as gas prices have been rising and storage is low.

Europe has already been through one major gas crisis, starting off around the summer of 2021. It began with higher market prices and unusually low storage volumes through the later part of that year. Of course, it culminated with the Nord Stream shut-off, and the huge spike in prices the next year. Some industries on the continent still haven’t recovered.

It’s very unlikely that the current Hormuz crisis turns out to produce anything as severe as this. But there are some signs of problems brewing that look eerily similar to what we saw at the beginning of that year. First off, futures prices are on an upward march. The Dutch front-month gas price, the European benchmark, has gotten back to roughly its highs from earlier this year when the Iran war began. It is at €60 per megawatt-hour, going up again on a prolonged lack of liquefied natural gas supply from Qatar, which normally supplies close to a fifth of the world market.

That is starting to produce higher power prices. German power futures for Q4 are now trading at a fairly high level of €141 per megawatt-hour, on the back of higher gas prices. Of course, the countries that will be hit with the proverbial big stick are those who rely a lot on gas for power generation, such as Italy. As of noon yesterday, the benchmark day-ahead Italian power price was about €170 per megawatt-hour. Since Edison, one of Italy’s major power producers, was a big customer of Qatar and has been force majeured by them, they are not in a great position.

The problem is not only now, however. It is what happens if this continues until the winter and interacts with another echo of 2021: lower storage volumes. As John Kemp has recently pointed out, storage volumes are now more or less where they were at the same point in the season that year. That is also about 16pp below the previous 10-year average. That is, give or take, a gap of about 16-17bn cubic metres. Put another way, that’s more than Belgium’s annual gas consumption.

That will be an issue if we’re in a position where we have to make up the difference with flexible or spot LNG cargoes, and the Hormuz situation is still not back up to normal. It will also leave us vulnerable to a number of external factors beyond what our next winter looks like, from how temperatures shape up in Northeast Asia to China’s LNG import trajectory.