On the Latest European Gas Supply Fears

Natural gas prices are up again, and it isn’t difficult to find apparent reasons why. From the conflict in the Middle East and suspected pipeline sabotage in Finland to labor strikes in Australia and a potential continental “Arctic Blast” coming this winter, there is a cacophony of alleged threats to Europe’s energy supply. All of these stories can ding sentiment. But supply fundamentals remain in better shape than appreciated—useful perspective for investors to keep in mind amid concerns that renewed energy troubles will batter a weary European economy.

Gas supply concerns span the globe. After the conflict between Israel and Hamas erupted last week, the Israeli energy ministry shut down production at the Tamar gas field, a large offshore natural gas source, citing security reasons. Tamar gas supply goes indirectly to Europe via Egypt, and some worry Israel may cease production at Leviathan, its other major gas field, should the conflict expand. Over two thousand miles to the north, Finland closed a gas pipeline in the Baltic Sea due to a leak, which the Finnish government blamed on “external activity.” Some interpret that as code for “sabotage,” which may be so—investigations remain ongoing. Rounding out the worries, workers at two major Australian liquefied natural gas (LNG) facilities continue striking this week, and analysts fear a potential “Arctic Blast” this winter risks a big uptick in European heating demand.

We get the concern. While on their own, none of these are a massive influence on supply, but together, they seemingly add up. In the Middle East, Tamar primarily serves Israel’s domestic needs, but some worry about spillover effects—e.g., the conflict strains Egypt’s gas supply, impacting exports to Europe and perhaps pressuring the Egyptian government to respond or face political blowback. In the Land Down Under, the offline Aussie facilities contribute to around 6% of global LNG supply.^[i] It hasn’t happened thus far, but instability in the Baltic region could affect production in Norway, Europe’s largest gas exporter.

But the associated feared outcomes are based on what is possible. For investors, it is critical to assess the probability of European power shortages. In our view, the worst-case scenario isn’t a given—or even likely at this point. As we noted in August, EU gas-storage levels hit their pre-winter target two months early, and some industry estimates show storage facilities now exceed last winter’s peak.^[ii]

Countries also continue adding buffers. While Germany’s underground gas storage caverns are over 97% full, officials have also approved bringing coal plants online from October – March 2024 to avoid shortages.^[iii] France, which relies primarily on nuclear energy, has also bolstered capacity after 2022’s “annus horribilis,” when many of the country’s nuclear plants were offline due to repairs. The country cut its atomic energy output by almost 25%, forcing it to become a net power importer for the first time since 1980.^[iv] This year state utility Electricite de France SA has more reactors online now than 2022—even when accounting for those offline due to planned maintenance.^[v] In Australia, talks between unions and LNG producers are making haphazard progress. We can’t predict when they will reach a deal, but even if work stoppages resume, they aren’t likely to be more than a temporary issue.

While European natural gas prices are up, they remain far away from last year’s all-time highs—which weren’t disastrous and didn’t lead to rationing and/or blackouts on the Continent. (Exhibit 1)

Exhibit 1: European Natural Gas Prices, October 2020 – October 2023

Source: FactSet, as of 10/17/2023. Dutch TTF natural gas prices, 10/17/2018 – 10/16/2023.

Last year, energy prices skyrocketed on supply fears tied to Russia’s invasion of Ukraine—and the corresponding Western sanctions (and Moscow’s retaliation to sanctions). Those developments inspired projections of plunging supply as Europe weaned off Russian oil and gas—a challenge, since Russia accounted for about 40% of the EU’s natural gas imports before the war. Many worried wintertime rationing and blackouts loomed.^[vi] But as we have written, that didn’t happen. As Fisher Investments founder and Executive Chairman Ken Fisher puts it, anticipation is mitigation—and Europe found alternative sources of supply and adapted accordingly.

Europe looks similarly prepared in the coming months. Research outfit Bruegel estimates current storage levels would allow Europe to withstand a particularly cold winter—with no Russian gas imports.^[vii] Moreover, even if demand picks up, Europe can find supply elsewhere in the world. The US exported a record-high volume of natural gas in the first half of the year, and the Energy Information Administration projects further increases over the next 12 months.^[viii] European nations are negotiating deals with Algeria, Congo and Azerbaijan, which are boosting production to satisfy continental demand.^[ix]

Ultimately, the ongoing worries surrounding Europe’s energy supply don’t seem like a little-noticed threat with big surprise power. On the contrary, it is very widely noticed. Forward-looking stocks have likely priced in the impact and moved on, rendering these concerns a big brick in the wall of worry bull markets climb.