Column: Europe’s gas storage more comfortable after mild January: Kemp

3 minute read

Gas pipes are pictured at Gas Connect Austria's gas distribution node in Baumgarten some 40 km (25 miles) east of Vienna March 6, 2013. REUTERS/Heinz-Peter Bader

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LONDON, Feb 2 (Reuters) - European gas traders are now much more confident the region’s inventories will remain sufficient through the end of winter, avoiding a price spike or the need for governments to introduce rationing.

The spread between futures prices for gas delivered in March (normally the last month of winter heating demand) and April (normally the first month of much lighter spring demand) has narrowed sharply.

The calendar spread has shrunk to just 3 euros per megawatt-hour, down from almost 19 euros in the middle of January and 45 euros in the middle of December, based on futures prices for the Dutch Title Transfer facility.

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The March-April spread is widely traded as a proxy for storage levels at the end of winter before sites start refilling with the arrival of spring weather.

But much warmer-than-average temperatures across the major population centres of Northwest Europe throughout January have avoided further pressure on already low inventories.

Cumulative heating demand so far this winter at Frankfurt in Germany has been around 7% lower than the long-term average through the end of January, compared with 3% lower at the end of December.

And the feared interruption of gas supplies from Russia as a result of the confrontation with NATO over Ukraine has not so far materialised.

Gas inventories in the EU and Britain are currently at 420 terawatt-hours, compared with a pre-pandemic five-year average of 542 TWh, according to data from Gas Infrastructure Europe.

In the last decade, the average drawdown between the end of January and the storage minimum for the year in late March or early April was just 207 TWh (https://tmsnrt.rs/3uhoryD).

Drawdowns from this point in the year have ranged from a maximum of 345 TWh (2018) to a minimum of as little as 106 TWh (2014).

Inventories are therefore likely to end the winter around 213 TWh, with a probable range from 75 TWh to 314 TWh ― which would be low but not critical, except in the most extreme scenario.

There is still a risk of colder than normal temperatures in the final part of winter or an interruption of supplies if NATO/Russia tensions escalate.

But the short-term risks are much lower than they were a couple of weeks or even a month ago, which is being reflected in the fall in both spot prices and the spread.

Northwest Europe is now 60% through its normal winter heating season, compared with just 50% in mid-January and 40% at the end of December, based on long-term average temperature patterns.

It would require an extended period of extraordinarily cold weather over the next eight weeks to offset the milder temperatures experienced in January and make this an average heating season overall.

Milder temperatures and the approach of spring have also diminished any short-term leverage Russia might exercise over gas prices to counter any sanctions imposed by the EU and the United States.

The principal risk now is that any large and sustained interruption of gas supplies will prevent storage sites from being refilled ahead of next winter, rather than emptying them before the end of this one.

Related columns:

- European gas prices incorporate low, diminishing Ukraine risk (Reuters, Jan. 25) read more

- U.S. gas stocks normalise, warm winter accommodates exports to Europe (Reuters, Jan. 10) read more

- Europe’s gas inventories get respite from warm weather (Reuters, Jan. 6) read more

John Kemp is a Reuters market analyst. The views expressed are his own

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Editing by Kirsten Donovan

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John Kemp is a senior market analyst specializing in oil and energy systems. Before joining Reuters in 2008, he was a trading analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests include all aspects of energy technology, history, diplomacy, derivative markets, risk management, policy and transitions.