Europe Wards Off an Energy Crisis, but Can It Avert a Squeeze Altogether?
It depends on the weather and the EU's economy.
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A lot has happened since last fall, when the entire world was convinced that Europe would fall into a recession as we headed into winter as natural gas prices were three to four times higher than where they are today. This year has taught us that every time consensus leans one way, it is exactly then that prices go the other way.
As we learned last winter, the European Union stockpiled natural gas way in advance expecting the worst ahead, but demand was not as strong as expected due to a warmer-than-normal winter, plus there were massive inflows from the US of liquefied natural gas (LNG) to make up for lost Russian gas. Lo and behold, gas prices fell to 50 euros/Mwh and today all politicians and governments are cheering that they managed to avert an energy crisis altogether.
This is rather short-term thinking on their part as there really has been no change to EU gas infrastructure other than to rely more on US LNG and making some long-term deals with Qatar. Europe is still at the mercy of Asian LNG demand as that can pull away some of their gas when they need it.
Today, inventories across the European Union and UK hit a record 1,146 terawatt-hours (TWh) on Nov. 5, according to Gas Infrastructure Europe. Stocks were 189 TWh (+20% or +1.96 standard deviations) above the prior 10-year seasonal average and Europe's storage sites were 99.6% full on Nov. 5, a record for the time of year.
Winter is off to a slow start and heating oil demand has not really picked up. There is no issue for gas today per se as the EU is set for this winter. If winter is a lot colder than normal there is a risk that we could see a faster depletion in inventories, though even then the EU probably should end the season quite comfortably.
After last year's gas price surge, industrial demand fell a lot due to all the conservation efforts that helped inventories build. Today, will the EU see a renewed upturn or fall further into a recession?
Given Germany's weaker-than-expected PMI data, it does not show any positive signs for a renewed pick-up in demand. The US economy also has started slowing down since the start of October as we saw its manufacturing and industrial production fall short of expectations. The biggest debate going into 2024 is whether we see a soft landing or a landing at all. It seems most are placing their bets on the former.
History teaches us to be cautious when the entire market is positioned in the same way. After all, starting this year all the same analysts were calling for a recession in the first half of 2023, which was delayed thanks to Bidenomics that produced excesses of fiscal spending that allowed the US economy to stay stronger for longer. Time shall tell whether these analysts will be proved right, but investors would be ill-advised to follow them, especially when the narrative is so one-sided today.
