Winter weather in Eurozone a key determinant if gas rationing is needed

A cold winter in Europe would require drastic cuts in gas consumption – consistent with hard rationing – in Germany and Italy. We assume gas supplies will be down by 20% y/y in peak season (October-March) due to the inability to fully compensate for the stop to Russian pipeline gas flows. In our central scenario, we expect cuts to gas consumption of around 15% y/y, due to demand destruction, savings, and fuel switching, with Germany and Italy avoiding hard rationing.

What you will learn:

• Based on a near-perfect inverse correlation between gas consumption and outdoor temperatures, a mild winter (temperatures 2°C above the long-term average) would deliver most of the required gas savings; a cold winter (temperatures 2°C below average) would mean a 5%-10% annual increase in gas use.
• The risks around gas use in winter are skewed to the upside, with the needed savings likely to be higher than model implied. The drop in gas use during a mild winter is likely overstated, even if the need for additional measures would be smaller.
• While recent developments in refilling gas storages have been positive, shifting the focus from planning for physical gas shortages to mitigating the price impact, a cold winter would likely tip Germany and Italy into hard rationing with the brunt borne by industry, as negotiating a deal with Russia to unlock additional pipeline supplies remains politically unpalatable.