The complete gas supply halt through the Nord Stream 1 pipeline further reduces the already small margin for error to balance the EU gas market this winter, Fitch Ratings says, although the bloc’s strategy to mitigate the worst effects on the market is still credible. The halt further increases the likelihood of a recession in the eurozone.
Russia now indicates that it does not expect to resume supplies until the “collective west” sanctions against the country over the invasion of Ukraine are lifted. Before the cut-off, the Nord Stream 1 pipeline was running at just 20% of capacity. The complete halt came four months earlier than we had previously assumed in our analysis. However, the EU plan, supported by increases in alternative gas supplies, particularly record liquefied natural gas (LNG) imports, and the reduced gas use by 15% in 2023 compared with 2021, should help to avoid acute shortages.
We now assume no Russian gas flows in September-December 2022 compared to the highly depressed levels in our previous assumptions. While this has an immaterial impact on our assessment of gas market balances, it may skew the risks to the downside, though partially offset by Germany now reaching over 85% of gas storage utilisation, with net injections into storage having continued over the weekend.
Still, uncertainties around the upcoming winter’s temperatures (a cold winter could increase demand by 5%), timeliness of LNG deliveries, the EU member states’ ability to coordinate efforts to overcome infrastructure bottlenecks and the evolution of the war in Ukraine could affect gas supply and demand in the region. Exposure to the Russian gas halt varies among EU countries. Those with a high dependency on Nord Stream 1 supplies and low immediate options to diversify gas sources, like Germany, have limited room for manoeuvre. However, Germany has already achieved a 13% reduction in gas demand in 5M22 yoy out of 15% we assumed for 2023 compared with 2021.
Our current assessment is that a full shut-off would reduce the level of eurozone GDP in 2023 by 1.5pp-2pp relative to our Global Economic Outlook forecasts published in June, with reduction of about 3pp in Germany and 2.5pp in Italy. A eurozone recession starting in 2H22 is therefore increasingly likely.
High natural gas prices are adding to the pressure on margins and cash flows of European companies. Utilities exposed to the gas value chain, and particularly those involved in importing and transiting Russian gas, are among companies that have taken the greatest hit. Refining, chemical, fertiliser and industrial companies have largely been able to pass on higher natural gas prices through product prices, but they may find it more challenging to increase prices further without reducing demand. Fertilisers and metals companies with high concentrations of assets in Europe face risks of reduced production and competitiveness compared with international peers.
Source: Fitch Ratings