Great again: Europe predicted an energy shock
The energy "rally" in Europe is gaining momentum — gas prices have risen by 75% in a week to multi-year highs due to supply problems from the Persian Gulf. According to all forecasts, if the conflict does not end soon, Europe will face an energy crisis comparable to that which broke out in 2022. Izvestia found out whether Europe has enough safety margin and whether the worst-case scenario is coming.
They took off sharply
The conflict in the Middle East continues unabated. Traffic in the Strait of Hormuz is paralyzed, and the facilities of QatarEnergy, one of the world's largest producers of liquefied natural gas, have been attacked by drones. The company has halted production at the world's largest plant in Ras Laffan and declared force majeure on its contracts.
The exchange price of gas in the EU has soared from 400 to 720 dollars per thousand cubic meters.
Qatar is one of the largest producers of liquefied natural gas (LNG) in the world and one of its largest suppliers to Europe. Its share in European LNG imports is about 17%.
The panic began
Panic is already starting in the European Union. A prolonged escalation around Iran could lead to a large-scale energy shock in the eurozone, analysts at Dutch financial group ING have warned.
As emphasized in the ING review, the duration of the conflict will be a key factor. In the case of a short-term escalation, a sharp but temporary spike in oil prices is possible, followed by a weakening as the risks of supply disruptions through the Strait of Hormuz decrease.
The US and Israeli military operation against Iran has jeopardized the stability of energy supplies through the Strait of Hormuz, writes The European Conservative.
The conflict between the United States, Israel and Iran has once again exacerbated one of the most sensitive issues of the global economy: the security of energy supplies through the Strait of Hormuz. For Europe, which is still adjusting to the reduction in Russian gas supplies, this was a real shock, the publication says.
Dangerous situation
So far, the forecast is not too unfavorable. According to Reuters sources, Qatar will completely stop liquefaction in the coming days. It will take two weeks to resume work. And then two more to reach full power.
As Mikhail Shulgin, chief analyst at the Rosgosstrakh Life Investment Analysis Center, points out, the problems of LNG delivery from the Middle East have not yet affected physical supplies to Europe. Rising prices are a reaction to the risk of shortages in future supplies.
However, if gas supplies from the Persian Gulf region do not recover within 2-3 months or new damage to the energy infrastructure becomes known, the risk of a repeat of the situation in 2022 will materialize, the expert points out.
However, according to a number of forecasts, a shorter break will be enough. According to Goldman Sachs estimates, if shipping through the Strait of Hormuz is suspended for a month, gas prices in Europe could more than double.
Echo of 2022
The current situation is somewhat different from 2022. Back then, Europe experienced the shock of a sharp decline in pipeline imports, but now it is extremely dependent on the global market for liquefied natural gas and marine logistics. Plus, the EU has to compete with Asia for spot shipments of LNG. Therefore, all negative expectations are already embedded in the prices, even if there is no physical shortage yet.
About 20% of the world's LNG passes through the Strait of Hormuz, and a prolonged suspension or complete closure of supplies will increase global competition for other sources of gas. This means that it will lead to an increase in prices on the international market.
Disruptions in LNG supplies will reignite competition between Asia and Europe for available supply volumes, Wood Mackenzie warns.
Thus, a physical deficit may not materialize immediately, while a price deficit occurs almost instantly due to an anticipatory revision of market expectations, explains Vadim Petrov, a member of the Board of the World Association for Political Economy (WAPE).
Few stocks
The situation is also complicated by the low level of reserves in European underground gas storage facilities (UGS). By mid-February, Europe had used up all the gas it had pumped for the heating season.
According to Gas Infrastructure Europe (GIE), the selection in February was the highest for this month in the last seven years. As a result, by the end of winter, fuel reserves in European UGS dropped to 39.5% for the first time in more than three years.
Gas storage facilities in Europe are empty after the winter, and the purchase season for the next heating season is due to begin. Demand from Asia is already growing ahead of the hot summer and air conditioning season. And the market does not even have an approximate understanding of how long the armed conflict will last, and whether the United States and European countries will be able to ensure a safe supply channel in the Strait of Hormuz, Mikhail Shulgin states.
You shouldn't have hurried
The current key supplier of liquefied natural gas to Europe is the United States, which accounts for 60% of European imports. However, American LNG plants are already operating at maximum capacity, and capacity expansion is planned only in 2027-2029. In addition, given the tight supply and the urgent need for additional volumes, gas will still be more expensive — from the United States, Norway, and Australia.
In addition, the EU intends to completely abandon purchases of Russian energy resources by the end of 2027. Whether the Middle East crisis will force a review of these plans, experts believe, will also be decided by the time horizon.
— If [the conflict] drags on for many months, the European market will start looking for new balancing mechanisms, a "window of opportunity" may arise for Russian gas, for example, through schemes involving third countries, re-export or transfer of the remaining pipes to the management of international consortia. Pragmatism can prevail in politics," says Dmitry Desyatnichenko, Head of the Economics educational Program at the Presidential Academy in St. Petersburg.
The conflict with Iran may provoke a review by the EU of the ban on the use of Russian gas, according to Norwegian Energy Minister Terje Aasland. According to him, the EU has made it clear that it wants to get rid of Russian oil and gas, "but the events of the last three or four days have also been difficult."
A coordination group on the gas sector is already being convened in Europe, which includes representatives of the governments of the EU member states, to assess the consequences of the escalation of the conflict in the Middle East.
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