Harsh winter and policy changes push prices to 10-month high
The EU’s gas storage levels have fallen to their lowest for this time of year since before the 2022 energy crisis, as the continent entered winter with lower-than-normal stockpiles and cold weather accelerates withdrawals.
Supply concerns have driven prices to their biggest monthly gain in more than two years, with the TTF benchmark gas price rising to as much as €42.60 per megawatt hour this week, a ten-month high.
Prices have also been affected by severe winter storms in the US, which have disrupted domestic gas markets and lifted European prices, as the continent has become increasingly reliant on seaborne US LNG following a sharp reduction in pipeline supplies from Russia.
The EU is missing roughly 130 full-sized cargoes’ worth of gas compared with the level a year ago, with 490 terawatt-hours of storage as of January 29, according to industry body Gas Infrastructure Europe. This has left gas in storage tanks at 43 per cent of capacity, the lowest seasonal level since 2022, when Russia’s invasion of Ukraine triggered a severe energy supply crisis across the bloc.
European storage was drawn down more quickly than usual during the month to mid-January, a move that was especially pronounced in countries such as Germany, where government policy meant less gas was stored than in previous years, said Natasha Fielding, gas analyst at Argus.
Germany entered the winter with roughly 20 per cent less gas in storage than at the peak level of the previous year, a result of both market conditions and policy changes.
In recent years, prices for some forward gas contracts have inverted, with summer prices trading above winter contracts. This was driven by government mandates requiring more gas to be stored in readiness for winter, which pushed up summer prices and, paradoxically, made it harder for traders to build inventories economically, said Fielding.
Last summer, however, both Germany and the EU eased storage targets in an attempt to cool the market and encourage more flexible storage behaviour.
These decisions were based on a more “relaxed” view of market conditions including a potential oversupply, with countries such as the US and Canada likely to increase production, said Olympe Mattei d’Ornano, global LNG analyst at BloombergNEF.
Even in an extreme scenario, such as conditions similar to the severe cold wave in Europe in 2018, the north-west European bloc would still retain 11 per cent of its storage by the end of March, a level not low enough to trigger blackouts, said Mattei d’Ornano.
Gas prices are likely to fall as the heating season ends and new capacity comes online, she added.
Investor positioning has shifted alongside the tightening storage picture. Data from Argus shows that hedge funds had moved to a net long position on the Intercontinental Exchange by mid-January, indicating rising expectations of higher prices, reversing their net short positions a week earlier. Many hedge funds, which typically take shorter-term positions, had previously been betting on falling prices since October.
Source: www.ft.com
Aleksei Andrievskii is the founder of the ANDRIEVSKII SEA WEALTH family office in Cyprus, a member of the advisory board at Bendura Bank AG, Liechtenstein