Bousso: ROI-Europe is in for a long and cold winter, as fuel buffers are dwindling.

The energy supply in Europe is alarmingly vulnerable as conflicts in the Middle East, Russia and the Middle East tighten the global markets for heating oil and liquefied gas. This has pushed inventories down to dangerously low levels.

According to official statistics, natural gas and heating oil make up the majority of Europe's residential heating. Gas accounts for approximately 30% of heating demand, while heating oil makes up roughly 10%. Both fuel markets are likely to be under extreme strain in Europe after years of energy shocks.

Gas vulnerability in the region is largely a result of a dramatic?transformation in its energy mix following Russia's full scale invasion of Ukraine in 2020. Europe quickly replaced Russian pipeline gas with LNG and became one of the largest importers in the world of super-chilled fuel.

This shift increased Europe's security of energy by reducing its reliance on Russia. However, it also complicated the energy dynamics in the region. Instead of relying solely on long-term flows, Europe competes with Asia and the other regions in an LNG global market where supply disruptions are almost instantaneous.

In recent months, this vulnerability has become more apparent.

MIDEAST LNG Crunch

Europe is falling behind in replenishing its LNG inventory before winter. According to LSEG, underground gas storage facilities are around 55% full at the moment, which is their lowest level since 2021.

Since the start of the Iran War, LNG imports to Europe have also slowed dramatically. Kpler reports that imports will be at 6.3 million tons in July. This is the lowest level since September 2024. Asia is a major factor. According to Kpler, LNG demand in the region has increased in recent months. A record 4 million tons from the U.S. was supplied in June and in July. These purchases diverted cargoes from Europe that would have otherwise been shipped. Many hoped that Qatar, which accounted for a quarter of the global LNG supply prior to the conflict when the Strait of Hormuz was briefly opened in April following the U.S./Iran interim agreement on peace, would soon resume exports. The renewed blockade in recent weeks due to escalating tensions between the U.S. and Iran has dashed those hopes.

Low inventories, weak imports, and a deteriorating outlook for?supply' are all contributing to a growing level of concern on the European market. Last week, benchmark European gas prices climbed above EUR60 per megawatt-hour. They surpassed their previous Iran War peak and reached their highest level since the beginning of 2023.

Prices will eventually rise, bringing more LNG to Europe. Even if imports improve in the next few months, it is likely that the region will enter winter with gas stocks well below the targeted 80% level.

THE DIESEL DEVIL

Europe is facing similar challenges with diesel, which has become one of this year's most pressing energy issues.

Diesel imports are a major part of the region's economy. The fuel is used to power transportation, industry, and heating oil. During the summer, consumers and fuel distributors build up their inventories to prepare for winter.

Inventory levels have actually decreased.

The Iran War has caused a disruption in Middle Eastern supply routes, resulting in a reduction of diesel exports. Losing those barrels forced consumers to reduce their stock, causing inventories to reach multi-year lows.

The European diesel inventory is at its lowest level since 2022. Stocks in the United States, which is the largest diesel exporter in the world, also fell to a 23 year low in May before?recovering around 10% in week ending July 17 according to the U.S. Energy Information Administration.

Two of the largest fuel exporters in the world have made policy decisions that have exacerbated this situation.

China has limited fuel exports in an effort to conserve its supplies since the start of the Iran War. It is still a huge unknown how it will manage its production and future exports.

In July, Russia, the second largest diesel exporter by 2025 in the world, banned diesel exports after constant drone attacks from Ukraine damaged its refinery facilities and reduced fuel availability at home.

Before the recent escalation of the war in Ukraine, Russia was shipping almost 1 million barrels a day, or about 12% global diesel exports. The ban has led to a dramatic increase in the refining margins. Recent European diesel crack spreads reached a record high of almost $65 per barrel.

These high prices have a tendency to reduce demand.

According to the International Energy Agency, diesel demand in Europe fell by more than 6% to 5,53 million bpd in April. The decline in diesel demand may be due to the shift towards gasoline and electric vehicles. However, the persistently high prices are forcing consumers and business to reduce consumption.

Even if tensions ease in the Middle East quickly, damage has been done to inventories. The global LNG and diesel market is likely to be undersupplied for several months, as countries build up stocks and compete over limited supplies.

This leaves Europe more dependent on a factor that it cannot control, the weather.

A mild winter might provide "enough breathing space" to prevent a full-blown crise. A prolonged cold snap that increases heating demand would expose how little room for error there is in Europe's system. The continent is now one winter away from an energy crisis after years of shocks.

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(source: Reuters)