European Gas Gamble: Lowest Inventories in 15 Years, Preferring a Mild Winter to Buy Gas at High Prices

Faced with its second energy crisis in four years, Europe has opted to prepare for winter with its lowest-ever energy reserves – a deliberate gamble, not a careless mistake.

European natural gas inventories are currently at only 67%, 13 percentage points lower than a year ago, and the lowest level in 15 years. The EU issued a statement last week saying that the current low inventory levels are "no cause for concern," citing Europe's significant reduction in reliance on natural gas since 2022. Behind this statement is the deliberate choice by some European governments to "wait and see"—preferring to bet on a mild winter rather than repeating the massive gas stockpiling and billions of euros in losses that occurred in 2022.

This strategy directly impacts the global energy market landscape. If Europe's gamble fails and it is forced to massively replenish its stock in the spot market after winter sets in, US liquefied natural gas (LNG) exporters will benefit, and European natural gas prices could surge. If the bet succeeds, European natural gas spot prices, which have already risen 75% since the end of June, may be curbed.

Behind the low inventory: Europe's proactive choice

The historically low gas storage levels in Europe are partly due to unmet market expectations. European buyers had hoped that the Strait of Hormuz would reopen and Qatari LNG would return to the market, thus driving down prices and allowing Europe to replenish its reserves at a lower cost at the last minute. However, this expectation has not yet materialized.

Meanwhile, the EU has provided a structural justification for low inventory levels. Since the 2022 energy crisis, Europe has been continuously adjusting its energy mix, with winter natural gas demand down 17% compared to 2022. The increased share of renewable energy in the energy mix is a significant driving factor. According to Wood Mackenzie data, Europe already requires less gas storage to sustain the heating season than in the past, making the low inventory levels somewhat justifiable.

Germany's Scars: A €670 Million Lesson Inspires Caution

Germany is the most representative country in this round of "not buying at high prices" strategy. Its gas storage rate is currently only about 50%, far lower than the more than 90% level of Portugal and Poland.

This approach is closely related to the painful experience of 2022. That summer, European natural gas prices hit record highs, and German market operator TradingHub Europe spent €8.7 billion (approximately US$10.1 billion today) to purchase gas for storage between June and October. Afterwards, it sold this gas back to the market over the next two winters, with estimated total revenue of only about €2 billion. According to Laurent Ruseckas, Executive Director of S&P Global Energy, this "buy high, sell low" strategy resulted in a loss of approximately €6.7 billion, most of which was ultimately borne by German gas users, with the government also sharing some of the losses.

The German government clearly intends to avoid a repeat of this situation—the additional costs, if passed on to businesses and consumers, would directly drive up inflation. Meanwhile, European natural gas spot prices have already risen by 75% since the end of June; hasty restocking at this point could push prices even higher.

Risk Scenario: In the worst-case scenario, inventory levels could fall to 14% by next spring.

Europe's strategy is not without its costs, and its risks are equally obvious.

According to Wood Mackenzie's most optimistic scenario, if LNG shipments from Qatar and the UAE resume as soon as possible and arrive in the European market around November, the European gas storage rate could still fall to 21% by the end of the heating season on April 1, 2027.

If the Strait of Hormuz remains closed for the remainder of the year, this figure could drop as low as 14%. If Middle Eastern LNG supplies have not yet returned to normal by then, the EU will face the prospect of filling its nearly depleted gas storage facilities at high prices in a tight market, a costly prospect.

Who are the winners: US LNG exporters poised to profit

For US LNG exporters, the European gamble presents a potentially huge opportunity. If Europe is forced to shift to large-scale spot market purchases, US exporters such as Venture Global and Cheniere Energy will directly benefit from rising prices. Venture Global, in particular, will see a significant portion of the gains due to its high exposure to spot prices.

However, a potential buffer is brewing. A strong El Niño weather system is expected to push European temperatures above normal this winter. If a warm winter materializes, natural gas demand will be suppressed, giving Europe more time to wait for Middle Eastern LNG supplies to return to normal, thus reducing the probability of being forced to replenish stockpiles at high prices.

Europe has already experienced the consequences of panic buying in 2022. This time, it's betting that remaining calm and waiting for the right opportunity might be the least costly option.

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