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European natural gas markets and governments are much calmer at the beginning of this winter heating season compared to last year, thanks to full gas storage sites and steady flows of LNG supply, including to the new import terminals built in the past year.

Governments and forecasters continue to warn against complacency despite the full inventories and the structural decline in Europe's gas consumption, prompted by demand destruction in industry and energy conservation among households.

Even if the EU manages to go through this winter without major disruptions or shortages in gas supply and another shocking surge in gas and power prices, Europe will have to come to terms with the fact that its natural gas prices are now being determined in faraway places, such as Australia, Japan, China, and the United States. Unpredictability and volatility are here to stay.

Europe is unlikely to struggle to procure LNG supply, but the price it would pay for gas "will increasingly be determined elsewhere," Reuters market analyst John Kemp writes.

LNG Dependence

Increased reliance on LNG, which replaced a large part of the lost Russian pipeline gas supply, renders Europe more vulnerable to global supply and demand issues. A strike at an Australian LNG export terminal, a fire at a U.S. export plant, or a cold snap in Japan or China would immediately reflect on the European benchmark natural gas prices, as seen in the past two months.

LNG demand in Europe and Asia has been rising in November compared to warmer October, but LNG spot prices in Asia have remained steady in the past few weeks amid high levels of gas in storage.

"Demand from end-users in northeast Asia has remained largely weak, with market participants flagging continued high terminal inventories in South Korea and Japan in particular," Samuel Good, head of LNG pricing at Argus, told Reuters last week.

In Europe, the benchmark natural gas prices have seesawed this week as traders weighed higher heating demand amid colder weather with still nearly full EU inventories. Below-average temperatures have raised demand for heating and natural gas, and traders have begun withdrawing natural gas from Europe's record-high inventories.

Record-High European Gas Inventories

The gas storage sites in the EU were 98.69% full as of November 21, according to data from Gas Infrastructure Europe. In the past weeks, most EU countries have made consecutive small net withdrawals of gas from their storage, the data showed. These were the first consecutive net withdrawals from Europe's gas storage since April-the end of the previous winter heating season.   Related: European Utility Giant Turns More Selective On Renewables Spending

In early November, EU storage sites were 99.6% full, way above the average of 89% full inventories for the past ten years, Reuters's Kemp notes.

Considering the changes in storage for the last decade, European gas sites would end this winter 52% full, or, in case of a very cold winter - 35% full in April next year. A very mild winter could leave storage sites 70% full when the 2023/2024 winter ends, per Kemp's estimates. 

In recent days, gas supply to Europe from Norway hit a three-year high, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said. Combined with ample LNG volumes at sea looking for a home, the peak winter contract of February has seen its premium over spot prices shrink to just $1.64 (1.50 euros) per megawatt-hour (MWh), Hansen added.

For now, record-high inventories and steady LNG inflows are giving Europe confidence that last year's energy crisis will not repeat itself.

However, the calmness in the market could turn into volatile turbulence again if fresh supply concerns emerge and if this winter is really cold in Europe and/or Asia. 

Uncertainty and Unpredictability

Governments and markets should be anything but complacent as the winter approaches as risks of tighter markets and soaring prices remain, analysts and forecasters say.

No one can predict how cold this winter in the northern hemisphere will be. Last winter was mercifully warmer than usual in Europe just as the continent was scrambling to import higher LNG volumes despite spiking prices to replace the lost Russian pipeline gas supply. 

It's not certain this winter will be equally warmer than usual, and weather will be the driving force behind the LNG market and prices. 

Weather is one of the biggest unknowns, Colin Parfitt, vice president for midstream at Chevron, told Bloomberg earlier this month. 

As Europe is buying increasingly larger volumes of LNG to meet its gas demand, the global nature of the LNG market and trading exposes Europe to supply disruptions as far away as Australia and to spikes in demand in Asia which is competing with the EU for LNG supply.

"LNG has evolved into a global commodity, which has had a significant effect on the price volatility that markets have experienced in recent years," Ana Maria Jaller-Makarewicz, Lead Energy Analyst for the Institute for Energy Economics and Financial Analysis (IEEFA) Europe team, said earlier this year.

"Gas markets are becoming riskier-gas and LNG prices are increasingly volatile and greatly affected by global factors," Jaller-Makarewicz wrote.

"The uncertainty of future events that could affect gas supply makes it extremely difficult to predict how the supply and demand could be balanced and how much prices could escalate by."

By Tsvetana Paraskova for Oilprice.com

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Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More