Following up on our "Winter Is Coming: Europe Faces Twin Diesel And NatGas Crunch" note earlier this month, which focused on Europe as a whole, UBS analysts focused on Germany's natural gas inventories Monday morning and warned that levels are alarmingly low for this time of year, raising the risk of elevated prices and a renewed supply crunch if the Northern Hemisphere experiences a severe winter.
Simon Penn, a London-based UBS macro strategist, wrote earlier today that Germany's NatGas storage is just 48% full, compared with 65% a year ago and 75% during the 2022 energy crisis.
We would go a step further: inventories are now at their lowest level for this time of year in 17 years.
Penn added more color:
Economist Felix Huefner sees Germany hitting 65% in November, compared to the government target of 80% and the EU's target of 90%. This generates a number of risks.
A surge in demand and hence gas prices if Germany attempts to achieve its targets; increased pressure on Germany's fiscal position if the government needs to use Trading Hub Europe (THE) to replenish stocks; pressures elsewhere in Europe as German demand crowds out other national buyers; Germany's regasification facilities are limited which means even if it can find LNG supply, it can't necessarily convert that to stored gas. Hence, a gas shortage could ensue late winter anyway.
The ECB estimates that a 10% increase in wholesale gas prices adds 0.6pp to Eurozone headline inflation. In addition, all that is likely to place downward pressure on German GDP, which is already threatened by the consequences of a near-dry Rhine river. There is now a mere 10cm of navigable depth at the Kaub pinch point - in February it was 400cm and a year ago 200cm. Cargo barges are down to 10-20% of capacity to stay afloat.
Circling back to our Aug. 7 "Winter Is Coming" note, we warned that it is not just a global diesel crunch keeping Goldman's Samantha Dart up at night. NatGas is another mounting concern.
Continued disruption through the Strait of Hormuz, compounded by historically low Rhine River levels, is slowing Europe's effort to rebuild NatGas stockpiles. That risk is now materializing in the inventory data.
Here is where Europe stands in terms of NatGas storage:
At this point, Europeans had better hope that a strong El Niño would produce relatively mild weather. Otherwise, the continent could face a cold and extremely expensive winter.