European natural gas inventory analysis: How long can 28% of gas reserves last?

Senior management at Equinor, the Norwegian energy giant, recently pointed out that Europe could face a severe shortage of gas inventories if the disruption to shipping in the Strait of Hormuz persists for one to three months. By the time Europe enters the current summer replenishment season, gas reserves have been significantly depleted. After a long winter, natural gas inventories are only about 28% left.

Inventory levels in Europe are now between 35 and 37 per cent, well below the seasonal norm of 50 per cent, raising the possibility that the usual 90 per cent target will not be met at the start of next winter's heating season. The European Union requires member states to maintain adequate stock levels, usually setting capacity targets of 80 to 90 per cent by early winter.

Inventory status: Northwest European inventories are below 30%, with the Netherlands falling to a ten-year low

A confluence of factors makes filling Europe's main gas storage depots in the second half of the year a daunting task. First, the winter peak in home heating and a surge in industrial electricity demand has led to the consumption of large amounts of natural gas, driving gas inventories in north-west Europe to below 30%, about double the overall inventory deficit of the European Union. Before spring, gas inventories in the Netherlands, Germany and France had fallen to extremely low levels: Dutch inventories plummeted to just 5.8% by the end of the winter, the lowest in a decade; German inventories fell to about 20%; French inventories hovered around 27%.

Price distortions and tight LNG supply: summer spot prices are higher than winter contracts

Secondly, according toFXTThe market observed that price distortions and inverted seasonal price curves have exacerbated Europe's gas crisis. An unusual market structure - summer spot prices are higher than winter contracts - has hindered the necessary inventory replenishment. The Dutch TTF seasonal spread remains in negative territory at around -1.3 euros/MWh. This unusual forward discount disrupts the traditional "summer low injection, winter high extraction" dynamic.

Europe is also facing tight LNG supplies, with increased global energy competition and the disruption of major LNG facilities by conflicts in the Middle East making restocking costly. Delays and infrastructure damage at key facilities such as Qatar, combined with the phasing out of some suppliers, have intensified global competition for spot cargoes, particularly in the face of strong demand from Asia.

National responses: Italian financial compensation vs German legal enforcement

European Union member states have responded differently to distorted pricing mechanisms. In Italy, regulators and gas transmission system operators have introduced financial compensation schemes that allow traders to participate in auctions, with market managers paying the difference between summer and winter gas prices to ensure gas storage targets are met. In Germany, the approach is different. Europe's largest economy has historically avoided forced injections through direct state subsidies, relying instead on legal mandates and market balancing tools. The German Federal Network Agency enforces strict statutory gas storage targets to guarantee winter supply security. Shippers and network users are legally required to meet storage obligations, ensuring compliance through market regulation, capacity bidding, and the strategic tools of the European Gas Trade Center.

Although domestic incentives differ, both countries are bound by European Union regulations requiring historically minimum inventory levels of 80-90 per cent before the winter heating season. Italy favours fiscal support, while Germany relies on regulatory mandates with the goal of passing on gas storage obligations to active wholesale market participants.

Scenario Outlook: If the disruption lasts for 1-3 months, TTF prices could skyrocket to 90 euros/MWh

If the conflict is resolved quickly, Europe could reach a manageable inventory level of 75 per cent by the end of the gas season, Equinor warned, but if the blockade continues for one to three months, the situation will become very severe and could send Dutch TTF prices soaring to €90/MWh. Higher natural gas prices are expected to drive market corrections, including an expected 10 billion cubic metres reduction in demand for power generation gas and an increase in industrial fuel switching.

Historical comparison: the situation is far less serious than after regional conflicts

That being said, Europe's current gas crisis is nowhere near as dire as the one it faced after regional conflicts erupted a few years ago. In fact, Germany is moving forward with its privatization process after Uniper received a multi-billion euro bailout during the 2022 energy crisis. Under the European Union state aid rules that approved Berlin's 2022 bailout, Germany is legally required to reduce its stake to a maximum of 25% plus one share by the end of 2028. Uniper's financial position has improved significantly after some supplier outages resulted in a net loss of 40 billion euros in 2022. The utility has won a major arbitration and has begun to repay the government aid. This financial health makes it extremely attractive for the private market.

European gas inventories are dangerously low, and any additional disruption would trigger a price spike

Taken together, European gas inventories are currently at dangerously low levels, well below seasonal normal levels. The inversion of Dutch TTF prices, tight LNG supplies and increased global competition have made restocking exceptionally difficult and expensive. If the Strait of Hormuz disruption continues for another 1 to 3 months, Equinor warns that TTF prices could surge to €90/MWh, forcing industrial demand disruption and fuel switching. Although the current situation is not as severe as it was during the 2022 energy crisis, Europe still faces a challenging summer restocking season, with the achievement of inventory targets highly dependent on the evolution of the geopolitical situation.