Why a Record-Strength El Niño Still Might Not Save Europe's Gas Market

Even a highly intense El Niño may not sufficiently alleviate Europe's gas market needs this winter, according to Rystad Energy's analysis. For European LNG demand to drop to or below last year's levels, winter temperatures would need to be at least 2 degrees Celsius above the historical average. Forecasts predict a strong El Niño event forming this winter, potentially the most intense since 2015, but a strong event exceeding historical trends would be required to dramatically shift Europe's import dynamics.

Uncertainty in weather forecasts means Europe is likely to still require significantly more LNG than last winter, even with El Niño's assistance. The situation is particularly concerning as hostilities in the Middle East have driven up LNG prices and reduced Persian Gulf deliveries. While a mild winter would offer some relief, it remains uncertain whether El Niño can generate a sufficiently cold winter to have a major impact.

A strong El Niño is highly probable, with an 81% chance of a 2-degree Celsius temperature increase and a 97% chance of exceeding 1.5 degrees. However, historical data shows that El Niño's effects vary by region, with Western Europe experiencing a larger warming effect than Southern Europe. Rystad Energy's base case anticipates a 1-degree Celsius rise in European winter temperatures for a 2-degree Celsius index, translating to an import increase of about 7 million tonnes compared to last winter.

This scenario, though bearish for gas markets, would alleviate upward pressure on import volumes. Market participants should consider a moderate warming effect as the current assumption, while closely monitoring forecast revisions that could move toward a more bearish outcome.