(Bloomberg) — Europe’s gas sector is entering a crucial few months as the end of the heating season starts the clock ticking to fill storage facilities that are emerging from winter two-thirds empty.
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Normally, traders can be expected to play a key role in refilling inventories because fuel is typically cheaper in summer, allowing them to turn a profit by storing large volumes, ready to sell when demand rises again next heating season.
But this year is far from normal. The first really cold winter since Europe lost most of its piped supplies from Russia has depleted reserves faster than usual, and was further exacerbated when remaining flows through Ukraine came to a halt in January. The tightened market has driven summer gas prices persistently higher than those for next winter, which – crucially – removes the financial incentive for storage trades.
One key question is what role governments will play to ensure the facilities are refilled — and at what cost. Of course, there’s still plenty of time before next winter arrives. But traders say the first few weeks of April will provide an indication of whether the various market participants are ready to start reinjecting gas despite the potentially unprofitable price structure, or if they intend to play a waiting game.
“Some solution needs to be found in the short term to get storage injections started even though the prices are inverted today,” said Russell Hardy, chief executive officer of energy trading giant Vitol Group. There’s a debate in the market over “who is going to perform this task,” he added.
The stakes are high: Going into winter without storage nearly full would leave the region exposed to intense prices spikes if it’s hit with extra cold weather or other unexpected factors.
European Commission rules stipulate that storage sites need to be 90% full by Nov. 1. However, recent proposals and discussions about flexibility on the timing of the targets have created huge uncertainty about how the rules will be implemented, sending prices swinging and keeping traders guessing.
Benchmark futures have retreated in recent weeks amid speculation that the refilling targets may be loosened, as well as optimism for a ceasefire in Ukraine. In fact, if the war were to end soon and lead to a return of some flows from Russia, prices would likely drop, but such a prospect seems distant.
For now, gas prices are roughly 50% higher than a year ago — at just over €40 a megawatt-hour — and will probably need to remain at current levels or higher to attract enough liquefied natural gas during the summer, Hardy said.
If Europe is lucky, Chinese demand for fuel will remain weak in the coming months and give Europe a better shot at attracting shipments. BloombergNEF expects Chinese purchases to fall this year for the first time since 2022.
But Europe will still have to pay up to keep attracting cargoes. Should prices fall closer to $12 per million British thermal units — about a $1 lower than where they are now — LNG would flow to Asia, where buyers are more price sensitive, according to Hardy.
High enough prices could help draw in more seaborne supplies to eliminate the seasonal spread, with prices for the first few winter months already starting to normalize a bit.
An additional challenge is that Ukraine also needs to import up to five times more gas than in previous seasons this year after fighting damaged a lot of its infrastructure.
Governments will face a tricky tradeoff if injections proceed too slowly. Acting too late could result in the region not building up a sufficient fuel buffer, or having to spend huge amounts of money to get supplies — as Germany did in 2022.
But interventions also risk jolting the market further. Germany’s gas market manager shocked traders in January when it presented a proposal to subsidize unprofitable storage deals — a move that drove summer prices dramatically higher. Two months later, it has yet to clarify how or whether it plans to proceed. Meanwhile, Italy brought forward its gas storage auctions to as early as February.
What Bloomberg Intelligence Says:
“European storage levels will reach about 87% full by Nov. 1, according to Bloomberg Intelligence’s base case scenario which assumes no return of Russian flows via Ukraine, LNG imports rising by at least 40% on year this summer, and no changes to storage targets.”
— Patricio Alvarez, senior analyst
A warm spring — as is currently forecast — could help injections pick up, as could signals from Brussels that it will apply a more flexible approach to storage rules, which some EU member states are pushing for.
“The key question is whether there will be a change in regulation and if this is the case, how much time there will be to react to such a change,” said Marco Saalfrank, head of continental Europe merchant trading at Swiss utility and trader Axpo Holding AG. If a change is only communicated around mid year, “there will be just a few months to inject, which could have an impact on prices.”
–With assistance from John Ainger, Ewa Krukowska, Eva Brendel, Tom Fevrier, Joe Wertz and Archie Hunter.
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