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Europe’s vast network of liquefied natural gas terminals can’t save it from a winter supply crunch.

LNG supplies entering European grids in July fell to the lowest for that month in three years and the outlook for this month is even grimmer. Just one cargo is scheduled to arrive in the U.K. in August and traders who have the fuel stored in Spain are set to export six cargoes to capture higher prices in Asia.

All of that comes as Russia has been flowing less gas to Europe, setting the continent up for a very difficult winter should freezing temperatures hit. With inventories at their lowest level in more than a decade, gas prices in Europe have been volatile. Records have been broken day after day, with the market on edge for updates on new supply that will come through the yet-to-be completed Nord Stream 2 pipeline linking Russia and Germany.

“Europe needs to refill storage, but with the current fight for cargoes, it seems like the market will be very tight unless pipeline flows increase,” said Oystein Kalleklev, chief executive officer of shipowner Flex LNG Ltd. “We need to prepare for a very volatile winter depending on winter weather.”

Russia has been flowing less gas to Europe via Ukraine — a key transit route — and supplies into Germany through the Yamal-Europe pipeline crossing Belarus and Poland also took a hit after a fire at a Gazprom PJSC facility earlier this month. The Russian gas giant said this week it was overwhelmed with record demand both abroad and in Russia, where it needs to refill storage sites depleted beyond normal last winter.

European production

Europe gets more gas from Russia than from the continent’s top producers. With domestic output in decline and the giant Groningen gas field in the Netherlands possibly closing three years ahead of schedule, the continent is becoming a lot more dependent on the vagaries of the global gas market to get the LNG it needs to keep homes heated and the lights on during the winter.

But tight supplies in Asia mean countries from China to Japan and South Korea have been willing to pay more, luring even the supplies stored in Spanish tanks. Demand for LNG in Asia will remain strong through the rest of the year, Mark Gyetvay, deputy chief executive officer of Russian LNG producer Novatek PJSC, said in an earnings call.

It’s not just demand that’s picking up. Gas supplies from Norway have been disrupted this year due to heavy maintenance after pandemic-induced delays. LNG production has also faced challenges, with numerous terminals from Trinidad and Tobago to Nigeria and Egypt also underperforming.

Supply disruptions aren’t “long-term structural issues” and will get sorted out, according to Jessica Uhl, chief financial officer of Royal Dutch Shell PLC, the biggest LNG portfolio player.

Imports into Europe are set to rebound in the fourth quarter due to more supplies from the U.S., Oman and Australia, BloombergNEF forecasts. Morgan Stanley is already expecting gas prices in Europe to ease as more LNG arrives in the continent.

October breather

“As Asian demand peaks in the summer, demand will start to go down in the autumn, so finally Europe may attract some spot LNG back and this might give Europe a breather in October,” Ronald Smith, senior oil and gas analyst at BCS Global Markets in Moscow, said by phone. “And if we have a very warm October we can keep injecting gas in storage sites.”

The price arbitrage between Europe and Asia for October deliveries has nearly closed, which suggests that more cargoes will opt to head to terminals in the Atlantic, according to traders. However, that is likely to be too little too late for European utilities to sufficiently refill inventories before winter’s icy weather descends on the region.

Nord Stream 2

Europe’s crunch could ease when the controversial Nord Stream 2 pipeline starts flowing gas. European gas futures slumped as much as 12% on Thursday after Gazprom PJSC said the pipeline will deliver initial 5.6 billion cubic meters of gas this year.

Gazprom says controversial Russian pipe can ship gas in 2021

“Nord Steam 2 supplies couldn’t come at a better time, with European gas stock shortages still down considerably year-on-year,” said said Tim Partridge, head of operations and trading at consultants DB Group. “A fully operational Nord Stream 2 may ease supply shortages in a calculated ‘white knight’ scenario. Russia cannot be seen to use energy as an economic or political weapon.”

Gazprom’s statement indicates that the link would be ready to start flowing the first gas “any time now and as soon as certification issues are cleared and ramp it up accordingly,” said Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies.

Still, the initial volumes via the link won’t resolve the supply crisis. Gazprom’s production is currently limited and initial flows via Nord Stream 2 will likely be offset by a reduction in flows via Ukraine, with the priority to fill the depleted storage sites within Europe, said James Huckstepp, an analyst at S&P Global Platts. He is bullish on European gas prices for the winter and expects flows on Nord Stream 2 from October.

And even as Europe is set to get more LNG in October, supplies will tighten again from November as Northeast Asian buyers prepare for the peak winter heating season, London-based consultant Energy Aspects said. Demand in the Asia Pacific will rise by 2.8 million tons from December to January, while supply in the region will only gain by less than half of that.

“This means that the region will need stronger flows from further supply sources,” Energy Aspects said in a report last week.

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