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Europe’s Next Gas Crisis

As complex as Europe’s energy situation may be, it can be understood with some relatively simple arithmetic. Barring another extraordinarily warm winter, the continent will have a natural-gas deficit of at least 60 billion cubic meters, which it will have to close with imports and consumption reductions.

MILAN – Europe can heave a sigh of relief – for now. Thanks to an exceptionally mild winter and a well-designed strategy of supply diversification and consumption-reduction measures, the continent avoided what could have been a catastrophic energy crisis following Russia’s invasion of Ukraine. Its untapped gas-storage capacity is at around 60% – ten percentage points above the historical average for this time of the year – and the benchmark TTF price has fallen more than 85% from its peak last August, from €340 per megawatt hour ($360/MWh) to less than €50/MWh.

But this run of good luck must not lead to complacency. There is a risk of significant repricing in the coming months, which would weigh heavily on firms and households’ energy bills. The tightness in European gas markets will likely become more apparent as summer approaches, possibly pushing prices back toward €100/MWh or even higher. The European Central Bank’s fight against inflation is not over.

As complex as Europe’s energy situation is, it can be understood with some relatively simple arithmetic. Before Russia’s invasion, European natural-gas consumption amounted to just under 500 billion cubic meters per year. Add today’s (unusually high) stockpiled gas, domestic production, and current imports of both natural gas and liquefied natural gas (including from Russia), and you get 440 bcm. Thus, Europe will need to cut consumption or increase LNG imports by 60 bcm to fill the demand-supply gap.

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