Europe’s Energy Crisis: End in sight or far from over?

Energy Crisis Outlook and Storage

• Europe can navigate the current winter without blackouts or major supply shortages due to significantly increased gas storage levels built during the summer.
• Storage volumes allow the continent to withstand a deficit in Russian gas supply that normally covers 20% of winter consumption.
• Mild weather conditions have further reduced heating demand, facilitating the storage buildup and easing immediate pressures.

Global Oil Markets and Russian Sanctions

• A price cap on Russian oil is set to begin in early December, targeting third-party buyers rather than European imports, which are already blocked.
• Enforcement relies on voluntary attestation and lacks strict verification, creating uncertainty regarding actual implementation.
• Russian oil volumes are expected to shift from Europe to Asia, causing market inefficiencies and volume losses.
• Goldman Sachs forecasts Brent crude prices to reach $115 per barrel by early 2023, up from approximately $90.

Structural Supply Gaps and Future Outlook

• The energy crisis is not a temporary issue; Europe will face the need to rebuild storage and manage demand deficits again in summer 2023 and summer 2024.
• New global liquefied natural gas (LNG) projects are not expected to come online until 2025–2026, extending the supply challenge.
• The primary solution requires additional global gas supply, as price-driven demand destruction remains the only current mechanism to balance the market.
• The number one near-term risk is weather; a colder-than-forecast winter could reverse the current optimistic balance.
• A rebound in China's industrial activity and LNG demand next year poses a significant medium-term risk to European supply availability.

Inflation and Economic Impact

• Despite falling wholesale gas prices, headline inflation in the Eurozone remains elevated, peaking around 13% in January 2023.
• High inflation is projected to reduce real disposable income by approximately 3% in coming quarters, as price spikes outweigh wage growth and fiscal support.
• Headline inflation is expected to remain high due to lags between wholesale price drops, retail contract adjustments, and government stabilization policies.
• A recession in the Eurozone is currently expected to begin in Q4 2022, lasting three quarters through the winter.
• The recession is forecast to be relatively shallow and moderate in depth, mitigated by fiscal support and the absence of immediate gas rationing.

Industrial Activity and Consumption

• Gas-intensive industrial sectors are showing sharp weakness; the EFOR survey for gas-intensive German firms has fallen to an all-time low.
• Overall industrial production has held up better than surveys suggest due to the resolution of global supply chain bottlenecks in non-gas sectors.
• Industrial and generation gas consumption in Northwest Europe is down approximately 35% in mid-November compared to average levels.
• Demand destruction is accelerating as price-protected contracts expire and cost pass-through mechanisms disappear.
• Future gas demand reductions are expected to rely partially on substitution toward coal reserves and improved French nuclear generation rather than solely price-driven cuts.

Government Interventions and Risks

• Support measures vary across the Eurozone: France has capped consumer prices, Germany is moving toward similar caps, while Italy and Spain rely more on tax rebates.
• Government support primarily targets households, which limits the depth of the anticipated recession by cushioning consumption.
• Goldman Sachs warns that subsidizing consumption can exacerbate the physical supply deficit by disincentivizing demand reduction.
• Wholesale price caps are viewed as dangerous; they could distort price signals, reduce liquidity, and deter new supply from entering the market.
• Policymakers are expected to extend existing support measures rather than introduce new, innovative interventions.
• Fiscal support is temporary; its unwinding in 2023–2024 will likely create a "fiscal cliff" effect, further dragging on growth.
• Risks to the economic forecast are skewed to the downside due to the potential for a colder winter, rising gas prices, and possible rationing.