Europe’s high gas stocks drive prices lower
Northwest Europe is roughly two-thirds of the way through the heating season, with a record volume of gas in storage for the time of year, which is putting downward pressure on gas prices.
Gas inventories across the EU and the UK stood at 771 terawatt-hours (TWh) on February 10, according to data compiled by Gas Infrastructure Europe (GIE).
Inventories were 238TWh (+45% or +1.95 standard deviations) above the prior 10-year seasonal average and the surplus had swelled from 167TWh (+18% or +1.70 standard deviations) at the start of October.
As a result, storage facilities were still 67% full compared with a 10-year seasonal average of 49%.
Futures prices have already fallen sharply, especially for nearby months, to encourage more consumption before winter ends and flush out some of the excess stocks.
MILD WINTER
At Frankfurt in Germany, twothirds of the heating degree days each winter occur on average on or before February 10.
With the heating season entering its final third, it is very likely stocks will end the depletion season at or close to a record high.
Based on the behaviour of inventories over the past 10 years, stocks are on course to end winter 2023/24 at 628TWh, which would be the second highest on record after 629TWh at the end of winter 2022/23.
The projected carry-out has increased from 554TWh on October 1, as a result of warmer than average temperatures and the continued impact of high prices suppressing consumption by industry and households.
Temperatures at Frankfurt were above the long-term average on 94 out of 133 days from October 1 to February 10.
Temperatures have been above average every month so far this winter but especially in October (2.5°C) higher than normal) and December (+2.8°C).
The total number of heating degree days since the start of the heating year has been 21% lower than usual at 1,133 compared with a long-term average of 1,441.
Offshore winds were stronger than the seasonal average in both December and January, boosting electricity production from wind farms.
The mostly mild and windy weather has cut direct gas consumption by households and in other buildings as well as by power generators.
At the same time, industrial consumption has been curbed by a combination of plant shutdowns caused by high fuel prices and a downturn in the business cycle.
Germany’s energy-intensive industries (including iron and steel, ceramics, glass, chemicals and fertilisers) reported production was down by more than 22% in December 2023 compared with the same month two years earlier.
The EU’s seven largest gas-consuming countries (Germany, Italy, France, Netherlands, Spain, Belgium and Poland) reported below-average usage every month in 2023.
For the year as a whole, total consumption in the seven major consuming countries was down by 7% compared with 2022 and 19% compared with 2021.
EXCESS STOCKS
Storage sites across the EU and UK are on track to be almost 55% full at the end of winter 2023/24 (with a maximum likely range from 44% to 61%).
Temperatures are projected to remain above normal across the EU and UK through the end of February, according to the European Centre for Medium Range Weather Forecasts.
The seasonal gas storage surplus is likely to continue swelling with storage very likely to finish the winter almost 60% full.
With so much gas carried over there will not be much less storage space than usual to absorb more during the summer refill season in 2024.
PRICE SLIDE
Prices for gas to be delivered in March 2024 have fallen to an average of €30 per megawatthour so far in February from €52 in October. Prices for March 2024 are trading below prices for April 2024 (the first spring month) to encourage more consumption and purge some excess stocks. As a result, the end-of-winter calendar spread from March to April 2024 is in an average contango of 22 euro cents so far in February down from an average backwardation of €1.44 in October.
Front-month prices of €28 in
February are in the 55th percentile for all months since the start of the century, once adjusted for inflation.
Real front-month futures prices have retreated from €47 (88th percentile) in October 2023 and a record €251 in August 2022.
Most energy-intensive industrial consumers buy gas on the forward market but here too prices have retreated to encourage more usage.
The calendar strip for the year-ahead (in this instance purchases over the course of 2025) has averaged €33 so far in 2024 down from €52 in 2023 and €121 in 2022.
After adjusting for inflation, year-ahead prices are just €5 (21%) above the average for the 10 years before Russia’s invasion of Ukraine in 2022.
Spot and forward prices are likely to remain under downward pressure until the storage surplus stabilises and leaves enough room to absorb excess seasonal gas production over the summer of 2024.
THE MOSTLY MILD AND WINDY WEATHER HAS CUT DIRECT GAS CONSUMPTION BY HOUSEHOLDS AND IN OTHER BUILDINGS