BERLIN – Russian President Vladimir Putin’s plans to squeeze Europe by weaponising energy look to be fizzling out, at least for now. 

Mild weather, a wider array of suppliers and efforts to reduce demand are helping, with gas reserves still nearly full and prices tumbling to pre-war levels.

After the sharp turnaround over the past month, Europe is most likely already through the worst of the crisis.

The combination of conditions – including China’s Covid-19 woes blunting competition for liquefied natural gas (LNG) cargoes – will take the edge off inflation, stabilise Europe’s economic outlook and leave the Kremlin with less leverage over Ukraine’s allies, if they persist.

While a cold snap or delivery disruptions could still throw energy markets into disarray, optimism is growing that Europe can now make it through this winter and next.

“The danger of a complete economic meltdown, a core meltdown of European industry, has – as far as we can see – been averted,” German Economy Minister Robert Habeck, a key architect of the country’s response to the energy crisis, said during a trip to Norway, which has taken Russia’s place as Germany’s biggest gas supplier. 

The crisis, triggered by Russia’s invasion of Ukraine last February, has already cost Europe close to US$1 trillion (S$1.3 trillion) because of surging energy prices.

Governments have responded with more than US$700 billion in aid to help companies and consumers absorb the blow. They also scrambled to unwind their reliance on Russian energy, especially natural gas.

The European Union is no longer importing coal and crude oil from Russia, and gas deliveries have been significantly curtailed. The bloc has filled some of the gap by increasing supplies from Norway and shipments of LNG from Qatar, the US and other producers.

In Germany, storage facilities are about 91 per cent full, compared with 54 per cent a year ago, when Russia had already been emptying facilities it controlled. German Chancellor Olaf Scholz’s government has since nationalised Gazprom’s local units and has spent billions of euros filling reserves. 

Energy-saving measures from industry and households as well as the warmest January temperatures in decades have helped preserve that cushion.

Benchmark gas prices have fallen to a fifth of records set last August, and despite concerns that lower rates could stoke demand, usage is still declining – a silver lining of the weak economy. European consumption is expected to be about 16 per cent below five-year average levels in 2023, Morgan Stanley said in a report. 

Favourable conditions and the expansion of renewable capacity are also helping. Higher wind and solar generation will help slash gas-fired power generation in 10 of Europe’s largest power markets by 39 per cent in 2023, according to S&P Global.

The dynamic has shifted to such an extent that there is now too much LNG arriving, according to Morgan Stanley. Deliveries set a fresh record in December, and the trend is likely to continue. 

Germany, once the biggest buyer of Russian gas, is opening three terminals this winter, and Europe’s largest economy expects its new LNG facilities to cover about a third of its previous requirements.

Steady supplies from non-Russian sources are likely to keep market prices from surging to the peaks of 2022. 

Despite the positive developments, prices are still higher than historical averages and risks remain. Russian pipeline gas imports in 2023 will be just a fifth of usual levels – about 27 billion cubic m (bcm) – and the Kremlin could cut them completely. 

That is “a massive reduction for a market that was consuming 400 bcm in 2021”, said Ms Anne-Sophie Corbeau, a researcher at Columbia University’s Centre on Global Energy Policy. 

LNG therefore will be critical to securing enough supplies for next winter, and Europe will need to remain alert. A rebound in China’s economy could stoke competition, with supplies tight until more capacity becomes available in 2025. Russia also has the ability to cause disruption in the market as one of Europe’s top three suppliers of the super-chilled fuel.

Still, the chances of a large rebound in Chinese LNG demand are evaporating, as the country turns to more affordable fuel options like coal, pipeline gas and domestic production.

In fact, China may not even need any spot LNG shipments in 2023, according to CICC Research.

BLOOMBERG