Photo: JOHN MACDOUGALL/AFP via Getty Images
A short, spoken-word summary from CSIS’s Ben Cahill on his commentary with Kunro Irié, "European Gas Storage Is Nearly Full. Now What?"
On August 16, the European Union met a key energy security target more than 10 weeks early: natural gas inventories reached 90 percent of capacity. The European Commission hailed this as an important sign of progress and credited its regulations last year that mandated cuts in gas consumption. It is encouraging that the European Union has already met its November target. Slowing European gas purchases in the coming months should reduce costs for Asian buyers working to build their own inventories. But even completely full gas storage in Europe is only sufficient to satisfy several months’ demand, and the market could tighten if the weather is harsher than last winter or if low prices incentivize more gas consumption.
Several factors enabled Europe to fill its gas storage ahead of schedule. First, a mild winter last year along with greatly expanded liquefied natural gas (LNG) imports left inventories at elevated levels. On April 1, gas storage was 56 percent full, well above the five-year average of 42 percent. Second, relatively low prices supported inventory builds. Prices at the Title Transfer Facility (TTF)—Europe’s most liquid gas pricing index—have remained below €50 ($54.55) per megawatt hour since early April. And third, industrial gas demand has been subdued despite lower gas prices, freeing up more gas for stockpiling. Across the European Union, industrial gas demand fell by 25 percent in 2022, and demand in Germany has been stagnant so far this year. After continued stockpiling over the summer, there is little room to absorb more gas molecules. LNG imports to Europe dropped by 7 percent in July, the lowest monthly volume since late 2021.
LNG imports in Asia have been relatively muted in recent months despite low spot prices. Since May, the Japan Korea Marker (JKM) spot price for Northeast Asia has mostly remained below $12 per million British thermal units ($12/MMBtu, equivalent to about $41 per megawatt hour). But in that period, data from Kpler show that LNG imports in Japan, China, and South Korea hardly increased. Asian LNG demand as a whole rose slightly in July, but there is little evidence that Chinese buyers are making opportunistic purchases. Buyers in countries like Pakistan, Bangladesh, and Thailand, which had difficulty coping with last year’s soaring LNG prices, have issued some tenders for spot LNG cargoes in recent months. But more notably, they continue to sign term deals with Qatar and other suppliers.
There are few signs of a coming demand spike in Northeast Asia. Gas inventories across the region are relatively high, Korea and Japan are ramping up nuclear energy generation, and gas buyers in China are now looking to sell excess cargoes.
Northeast Asian buyers’ demand for prompt and winter cargoes looks weak. China has been increasing its coal use and its pipeline gas imports from Russia. Japan and Korea have seen a rise in nuclear power generation which is covering for the growth in power demand despite a warmer than usual summer. The latest LNG inventory data for electricity generators shows there is still room left to build up stockpiles before winter. LNG buyers are mostly covered from their steady long-term supply contracts and are in no hurry to make additional purchases. Some utility companies have even been observed seeking to sell their long position for third and fourth quarter cargoes, again illustrating weaker demand in the region, despite news of potential supply disruption from major Australian LNG projects.
A severe winter can always change the tide of the demand supply balance, but latest weather forecasts suggest a relatively low likelihood of a cold winter. With Pacific countries in no rush to purchase additional cargoes and the European market signalling weak industrial demand and ample supply, LNG balances and prices look relatively loose.
After Russia’s war on Ukraine created a spike in European LNG demand, price risks seemed almost inevitable. China’s long-anticipated economic rebound threatened to increase Asian demand and tighten the market, at least until a new wave of LNG supplies come online in the United States, Qatar, and other countries beginning in 2026–2027. Eighteen months later, the worst-case scenario has not materialized, but how has the market changed?
On the supply side, last year showed the capacity of LNG aggregators to divert supplies from Asia to Europe to meet winter demand—if volumes are available in the market and European buyers can outbid Asian consumers. Globally, the rekindling of energy security concerns also drove a substantial increase in contracting activity. Building on last year’s momentum, three U.S. LNG export projects constituting 38 million tons per year capacity have already reached final investment decision in 2023, with several more inching in that direction. Qatar is chipping away at the considerable task of marketing new LNG volumes from its six expansion trains at Ras Laffan (total capacity of 49 million tons per year), as well as volumes from expiring contracts. Some European buyers have signed long-term LNG contracts, but Asian buyers and portfolio players have inked the majority of new long duration supply deals.
Should buyers now be worried about an oversupplied market, even before the next wave of projects arrive starting in 2026? Abundant inventories and soft demand suggest a fundamentally oversupplied outlook for the short term. However, this is a fine balance. LNG demand is growing each year and expected to increase for up to 20 years alongside rapid growth in renewable energy. If buyers use up their gas inventory this winter, the following year may see a surge in demand from all regions. Project delays could occur as well, which could tighten the market in the coming years.
For now, the worst-case scenario of a strong demand rebound in Asia, tightening supplies, and high prices for importers does not seem to be occurring. But LNG prices are inherently prone to volatility. Compared to other fuels, inventory capacity is relatively low, there are limited supply sources, and disruptions are always possible. The fact that a potential strike at three Australian LNG export facilities could affect up to 10 percent of global supply illustrates susceptibility to shocks. For now, the energy security picture heading into this winter looks better than expected, but it is too early to be complacent.
Ben Cahill is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C. Kunro Irie is a visiting fellow with the Energy Security and Climate Change Program.
