- Europe's urgent need to refill gas storage for winter is significantly increasing global LNG prices, leading to reduced demand and higher costs for Asian importers.
- Europe's energy policies, including the phasing out of alternatives like coal and nuclear, have limited its flexibility and made it highly reliant on expensive LNG purchases.
- The continued high cost of LNG poses a long-term financial strain on European governments and industries, while Asia often relies on more affordable alternatives like coal and pipeline gas.
Europe has accelerated its purchases of liquefied natural gas to refill its storage caverns for the winter, and once again, this has driven prices higher, sapping demand in Asia. This could turn into a seasonal pattern until new LNG capacity comes onlineand it will definitely add to Europes energy cost woes.
Natural gas in storage in the European Union is currently at 58.90% of capacity . This time last year, gas in storage was at 75.5% of capacity, per S&P Platts data cited by Reuters Clyde Russell this week. It needs to reach 90% by November this year, or December, at the latest, per the EUs storage target. This means that European buyers have little choice but to ramp up LNG purchases, whatever the costbecause they have no alternative.
The reason, of course, is Europes deliberate elimination of alternatives such as coal and, in the case of Germany and now Spain, nuclear. This eliminationin the name of a transition to low-emission energy generationhas reduced European countries flexibility in sourcing their primary energy. So Europeans have been buying lots of LNG, to the tune of some 208.62 million tons over the first six months of the year, which was up by 1.7% from a year ago, Russell reported, citing Kpler figures.
The inevitability of LNG purchases means that this will continue no matter what happens. For example, last month, the surge in prices was prompted by the war between Israel and Iran. With Europe still mostly unwilling to commit to long-term contracts, it has made itself vulnerable to such price swingswhile Asia sticks with coal that it could fall back on should gas prices soar.
In June, spot LNG prices in Asia hit a high of $14 per million British thermal units before retreating to $13.10 in the final week of the month. The war premium had a big role to play in that price jump, but so did consistently high shipments to Europe. Asian importers, meanwhile, reduced their intake in the face of higher prices. But heres the thing. China can afford to buy less LNG because it can ramp up pipeline imports from Russia and Central Asia. Europe does not have the luxury of an alternative supply. Europe, in other words, is stuck with LNG because Norway cannot boost its gas output either as fast or as high as it is necessary if Europe wants an alternative gas supply.
Its worth noting, however, that many Asian energy importers have made promises to buy more U.S. liquefied gas specifically in order to avoid the tariff axe that President Trump has been waving at the world. This has limited their wiggle room, as it were, with regard to volumes. With regard to prices, however, long-term deals tend to fetch more stable prices, insulating both buyer and seller from the whims of the spot market.
Even with the U.S. LNG purchase commitments, however, India has seen an 8.7% decline in its LNG imports over the first half of the year, suggesting price remains a not inconsiderable issue. Chinas LNG imports, on the other hand, were down a lot more sharply, by 22%. The tariff war with the United States was certainly a big factor, but Europes demand may well have played a part as well. With European buyers willing to pay a premium to fill those storage caverns, Chinese gas traders have been happy to resell their LNG cargos, especially those coming from the U.S. and subject to new import tariffs in response to U.S. tariffs.
So, chances are that Europe will continue to have to pay a premium to secure its gas reserves for peak demand season. Normally, there would not be a huge problem with that. Right now, however, Europe is spreading itself increasingly thin with spending plans, just as its heavy industries begin to raise the alarm about exorbitant energy costs. Expensive LNG is not going to do anything about these costs, and this means governments will have to step in. This, in turn, means even more spending to keep vital industries such as steelmaking alive.
Asia, meanwhile, will continue to drive coal demand globally with its more open approach to energy security, prompted by the fact that most Asian countries cannot afford LNG on a whatever-the-cost basis. The problem, for Europe, is that it cant afford LNG on a whatever-the-cost basis over the long term, either. The EUs gas storage refill bill looks set to be overall higher than last years. If this winter is as regular as the last one, this would mean an even higher storage refill bill for 2026. This would mean more support for businesses and, likely, households. At some point, wealthy Europe is going to find its not that wealthy anymorebecause of its energy policies.
By Irina Slav for Oilprice.com
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