Picture: BLOOMBERG
Picture: BLOOMBERG

Russia’s winter defeated Napoleon Bonaparte and Adolf Hitler. The bitter season has played such a historic role against the nation’s enemies that it now enjoys military rank, popularly known as General Moroz and General Zima (“frost” and “winter”). In the great European natural gas battle of 2021 and 2022, however, the weather has so far worked against Moscow. If President Vladimir Putin was counting on Moroz and Zima, the commanders have yet to show up at the Western front.

Mild weather has so far crushed heating demand and soothed the European market panic about supply that saw natural gas prices shoot up to record highs. In recent days, London, Berlin and Paris have enjoyed spring-like weather. On New Year’s Eve, the mean temperature in northwest Europe was nearly 12°C, about 9°C above the 30-year average. A few cities were even warmer: Zurich and Frankfurt stood at 13°C, compared with a normal level of around freezing for both.

For Europe, which imports 40% of its gas from Russia, it has been an economic and geopolitical reprieve.

From a record high of nearly €188 per megawatt hour (MWH) on December 21, gas plunged to a low of €65.40 per MWH by December 31, an unprecedented 65% drop in just eight trading days.

Gas isn’t just used for heating and industries. Europe burns lots of it to generate electricity. And so the mild weather has avoided the worse-case scenario: blackouts. US shiploads of liquefied natural gas (LNG) have also helped push prices down — quite an irony since European countries vehemently opposed fracking, the technique that has unlocked American gas.

Before the spell of mild winter, Europe was heading into a full-blown crisis. Gas inventories were well below the five-year and 10-year averages. On Christmas Day, Europe had the equivalent of 629 terawatt hours (TWh) of gas in storage.

Natural gas prices remain high but a mild season has so far allowed storage to remain above the levels associated with power blackouts in Europe. Picture: BLOOMBERG
Natural gas prices remain high but a mild season has so far allowed storage to remain above the levels associated with power blackouts in Europe. Picture: BLOOMBERG

If a normal winter ensued, estimated inventories would fall to below 200TWh by the end of the heating season in late March — the lowest on record. A colder-than-normal winter, like the one in 2017/2018, would have cut gas stocks to about 90TWh, a shivering 50% below the previous low.

Many traders said the stability of the gas network would be jeopardised if inventories dropped that low. They expected prices to rise to ultra-high levels and result in “demand destruction”, with energy-intensive industries like aluminium smelters and glass manufactures forced to shut down. Spurred by the alarm, gas prices jumped to a record high on December 21.

So far, though, the less-than-frigid season has reduced the risk that gas in storage would plunge to the much-feared lows. Over New Year, European gas stocks actually increased for four consecutive days, something that had never happened before over the same period. As things stand, a normal winter would leave stocks at about 240TWh by the end of March — still the third lowest but not as bad as many feared. A cold winter would cut them to about 140TWh, a record low, but above the catastrophic 100TWh barrier associated with blackouts.

Europe may have avoided a calamity but the continent isn’t out of the woods. Temperatures are expected to drop to seasonal levels again this week, increasing demand. Gas prices have climbed back to nearly €100 per MWH — still about 45% below the most recent peak but also far above the 2010-2019 average of roughly €20 per MWH. Regional gas inventories are likely to end the 2021/2022 winter extremely low, so high prices are going to continue into the summer, and likely into the 2022/2023 winter, too.

Meanwhile, Russia is keeping a tight grip on the region. Gazprom, the Kremlin-controlled gas exporter, has reduced supplies into Europe significantly in recent days in response to lower demand. Gas hasn’t flowed into Germany via the key Yamal-Europe pipeline for 15 consecutive days — something that had never happened in the middle of the winter. An additional choke point: the thousands of Russian troops on the border with Ukraine, through which much of Europe’s gas transits.

In the television drama The West Wing, the fictitious US President Josiah Bartlet asks the Russian ambassador how Moscow cultivated its geopolitical nerve. “From a long, hard winter, Mr President,” said the envoy. Look at the calendar: spring in the northern hemisphere is still 73 days away. Generals Moroz and Zima have time to show their mettle.

Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion

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