Russia’s Winter Generals Have Yet to Show Up at the Gas War

(Bloomberg Opinion) -- Russia's winter defeated Napoleon Bonaparte and Adolf Hitler. The bitter season has played such a historic role against the nation's enemies that it now enjoys military rank, popularly known as General Moroz and General Zima (that is, “frost” and “winter”). In the great European natural gas battle of 2021-22, however, the weather has so far worked against Moscow. If President Vladimir Putin was counting on Moroz and Zima, the commanders have yet to show up at the Western front.

Mild weather has so far crushed heating demand — and soothed the European market panic about supply that saw natural gas prices shoot up to record highs. In recent days, London, Berlin and Paris have enjoyed a spring-like weather. On New Year's Eve, the mean temperature in north-west Europe was nearly 12 degrees Celsius, about 9 degrees above the 30-year average. A few cities were even warmer: Zurich and Frankfurt stood at 13 degrees Celsius, compared with a normal level of around freezing for both. For Europe, which imports 40% of its gas from Russia, it has been an economic and geopolitical reprieve.

From an all-time high of nearly 188 euros ($212.95) per megawatt hour on Dec. 21, gas plunged to a low of €65.40 per MWh on Dec. 31, an unprecedented 65% drop in just eight trading days. Gas isn't just used for heating and industries — Europe burns lots of it to generate electricity. And so the mild weather has avoided the worse-case scenario: blackouts. U.S. shiploads of liquefied natural gas (LNG) have also helped push prices down – quite an irony since European countries vehemently opposed fracking, the technique that has unlocked American gas.

Before the spell of mild winter, Europe was heading into a full-blown crisis: Gas inventories were well-below the 5- and 10-year averages. On Christmas Day, Europe had the equivalent of 629 terawatts hours of gas in storage. If a normal winter ensued, estimated inventories would fall to below 200 TWh by the end of the heating season in late March. That would be the lowest on record. A colder-than-normal winter, like the one in 2017-18, would have cut gas stocks to about 90 TWh, a shivering 50% below the previous all-time low. Many traders said the stability of the gas network would be jeopardized if inventories dropped that low. They expected prices to rise to ultra-high levels and result in “demand destruction” — with energy-intensive industries like aluminum smelters and glass manufactures forced to shut down. Spurred by the alarm, gas prices jumped to an all-time high on Dec. 21.

So far, though, the less-than-frigid season has reduced the risk that gas in storage would plunge to the much-feared lows. Over New Year, European gas stocks actually increased for four consecutive days, something that had never happened before over the same period. As things stand, a normal winter would leave stocks at around 240 TWh by the end of March — still the third lowest level ever, but not as bad as many feared. A cold winter would cut them to about 140 TWh, a record low, but above the catastrophic 100 TWh barrier associated with blackouts.

Europe may have avoided a calamity — but the continent isn't out of the woods. Temperatures are expected to drop to seasonal levels again today, increasing demand. Gas prices have climbed up back to nearly €100 per MWh — still about 45% below the most recent peak, but also far above the 2010-2019 average of roughly €20 per MWh. Regional gas inventories are likely to end the 2021-22 winter extremely low, so high prices are going to continue into the summer, and likely into the 2022-23 winter, too.

Meanwhile, Russia is keeping a tight grip on the region. Gazprom, the Kremlin-controlled gas exporter, has reduced supplies into Europe significantly in recent days in response to lower demand. Gas hasn't flowed into Germany via the key Yamal-Europe pipeline for 15 consecutive days — something that had never happened in the middle of the winter. An additional choke point: the thousands of Russian troops on the border with Ukraine, through which much of Europe's gas transits.

In the U.S. television drama The West Wing, the fictitious American President Josiah Bartlet asks the Russian ambassador how Moscow cultivated its geopolitical nerve. “From a long, hard winter, Mr. President,” said the envoy. Look at the calendar: spring in the northern hemisphere is still 73 days away. Generals Moroz and Zima have time to show their mettle.

More From Other Writers at Bloomberg Opinion:

Putin's Priority Is Selling Gas, Not Waging War: Leonid Bershidsky
The Cold War Playbook Won't Help Alexey Navalny: Hal Brands
Putin Is Only Pretending to Be Crazy on Ukraine: Eli Lake

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of "The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources."