Europe Gas Prices Slump to Moderate Storage Build

London: According to reports, gas prices in Europe have plummeted due to mild weather conditions and a decline in industrial consumption. This has resulted in an abnormally high level of inventories across the European Union and the United Kingdom (EU28) for the 2022/23 winter season, with reserves reaching what is known as their second highest total since records began. Due to this abundance of gas available at the end of winter 2022/23, less will need to be stored during summertime for use during winter 2023/24, putting extra pressure on suppliers. If supply continues to outstrip demand over the coming months, it could potentially overwhelm storage systems unless managed carefully.

If prices remain high, there is insufficient storage demand to accommodate all the excess production throughout summer months. If left unchecked, costs would drop drastically in the summer to motivate increased consumption, deter production, and impede imports. Fortunately, the futures market has a forward-thinking approach and has already started to reduce pricing in order to decelerate inventory growth and keep ample space for stocks that need to be added during the summer.

Government officials have repeatedly vocalized their desire for stricter conservation of gas and electricity resources to secure provisions for the 2023/24 winter season. Nonetheless, Europe's storage facilities are intended primarily to tackle how demand fluctuates throughout the year, not as a defensive measure in case of embargoes or blockades. The EU28 gas reserves differ greatly from those within the United States Strategic Petroleum Reserve or other countries' emergency petroleum stockpiles. With limited holding capacity within the gas storage system, attempting to safeguard supply security through increased preservation during 2022/23 will likely have only a minimal effect.

Gas stocks have increased 9 TWh between December 23rd and January 2nd compared to the average seasonal depletion of 26 TWh within the same timeframe in the past decade. This brings inventory up to 218 TWh, a surplus that stands at 30% or 1.98 standard deviations more than what it was when winter began in October.

Considering seasonal movements from the preceding ten years, storage is projected to drop down to 562 TWh before winter's close. That would still be the second-highest level in a decade (2019/20 ending at 609 TWh) and above the 10-year average of 345 TWh. Unequivocally, this winter has seen consistent growth of reserves which can be credited to pricey energy rates, decreased industrial activity, and higher temperature levels resulting in greater LNG imports. Total storage capacity is limited to 1,129 TWh so by winter's end it is estimated that 50% will remain filled with a potential range of 39-66%. With such figures, there still won't be much room for additional gas during the replenishing period between April and September.

With inventories moving in an unsustainable manner, traders have shifted their expectations with regards to how low levels may dip come winter's end. Lower prices are being implemented to increase consumption as well as redirect LNG to cost-sensitive buyers in areas such as South and East Asia. The price of gas slated for delivery at the conclusion of winter in March 2023 has drastically fallen from 135 euros per megawatt-hour (MWh) on December 15th, and even more so from 194 euros at the start of winter on October 1st, now cited at 68 euros MWh.

Additionally, the spread between the calendar months of March and April 2023 has shifted from a multiple euro backwardation on December 15th nearly down to one euro, contrasting significantly with its 10-euro position at winter's commencement. Though officials have expressed dissatisfaction over extreme prices encountered during 2022 after Russia's invasion of Ukraine, high rates ultimately caused a decrease in demand paired with larger than usual imports of LNG which abstracted any chance of running out prior to 2021/22 winter. Europe's gas market worked effectively - policymakers are now turning their attention to ensuring a seamless bridge between prices and stocks leading up to 2023/24 winter.