European Gas Faces a Raft of Challenges With Transit Deal Ending
Europe is about to lose a chunk of its gas supplies, with a key transit deal between Moscow and Kyiv expiring Dec. 31. Unless an alternative arrangement can be made in the final days of the year, the halt of Russian flows via Ukraine will present a slew of challenges to an already tight market:
Gas Storage
The biggest concern for traders is the pace of withdrawals from storage as Europe’s inventories are depleting rapidly. They’ve shrunk to about 75% full, a level reached a month earlier than last winter. That’s a worrying sign, not only for what remains of the heating season but for stockpiling efforts later in 2025.
Summer-Winter Spread
Volatility is likely to persist. Contracts for next summer recently surged above those for winter 2025-26, which will make it more expensive to replenish storage ahead of the next heating season.
“The market will be challenged to get back to comfortable storage levels going into the winter of 2025-2026,” Anatol Feygin, chief commercial officer at US gas exporter Cheniere Energy Inc., said earlier this month.
Russian Supply
Even with the loss of supplies via Ukraine, Russia can still deliver gas to Europe via Turkey, though capacity on that route can’t fully compensate for the likely shortfall next year.
Russia also ships liquefied natural gas. In fact, the European Union snapped up a record amount of Russian LNG this year, and while some officials in the bloc have called for an embargo, there’s still no region-wide ban.
Starting in March, however, Russian LNG ships will no longer be allowed to use European ports to transfer their cargo to other vessels traveling beyond the EU. That may mean more Russian LNG stays in Europe, according to BloombergNEF.
Competition for LNG
Europe will increasingly have to compete with Asia for LNG cargoes from global producers. When gas prices drop, emerging Asian markets ramp up purchases.
To attract more supply, Europe can resort to flexible US LNG, which is not restricted by destination, Cheniere’s Feygin said.
US President-elect Donald Trump this month called on the EU to buy more American gas, saying he’d slap tariffs on the bloc if it failed to do so. European Commission President Ursula von der Leyen has also said US LNG could help replace cargoes from Russia.
But several LNG expansion projects around the world, including in the US, face delays. Cheniere’s own new venture in Texas will be “relatively slow to ramp up” through 2025, Feygin said.
Hedge Funds’ Big Bets
Hedge funds have expanded their presence in Europe’s gas market in recent years. They’re heading to the end of 2024 with record volumes of long positions — effectively a wager that prices will rise. Several traders have raised concerns that the concentration of such bets could lead to a selloff, roiling an already fragile market.
The region’s economy has been slow to recover from the energy crisis of 2022, and continued gas-price volatility would make it hard for businesses and households to plan for the future.
