Russia has effectively halted all shipments of gas to the EU, ostensibly for technical reasons. What if that “embargo” remains in place through to next Summer (June 2023)?
The chart below shows our estimates of the likely path of EU inventories of natural gas, assuming 1) no supplies from Russia and 2) a partially offsetting increase in supply from the US, Norway and Azerbaijan relative to 2021.
The vertical lines indicate when inventories would fall below the normal winter minimum of roughly 30bn cubic meters (less than one month’s demand in Spring).
Crude as our estimates are they highlight a couple of points:
A) With no reduction in EU wide demand, gas and power supply for industry would likely need to be curtailed (drastically) from January onwards and perhaps start to improve again from early May.
B) With a 15% reduction in EU wide gas demand relative to 2021, inventories would likely dip very briefly below the 30bn cubic meters mark and the impact on industrial activity would most likely be small and temporary.
This also helps to explain why Putin needs to stop gas supplies to Europe now in order to maintain political leverage.
Notes: our estimates are necessarily pretty crude but they assume:
Demand assumptions: Winter 2021/22 in Europe was relatively mild with a couple of cold snaps. For what it’s worth the long-range forecast for this winter is very similar. So we have used last year’s gas demand pattern as a template for the coming 10 months.
Supply assumptions: Russian gas exports to Europe between September 2021 and April 2022 ranged between 10bn Cubic Meters and 12.2bn CM, and averaged10.9bn CM per month. Of that, roughly 6bn a month was supplied via Nord Stream 1. For this exercise we assume no gas at all is delivered to Europe for the next 10 months. So far this year, US supply of LNG to Europe has been running at about 3.4bn CM per month above the 2021 average. We assume that largely continues through the Winter. Smaller amounts of incremental supply to Europe are likely to come from Norway and Azerbaijan.
Algeria is the third largest supplier of gas to Europe: so far in 2022 exports are running slightly below last year’s record but we assume that exports to the EU will return to 2021 levels over the winter months. China has been re-directing excess imports of LNG from Russia to Europe for the last few months but we assume that will wind down over the winter. Current EU inventory levels are 90bn CM.
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