Europe’s natural gas prices have jumped by 40% over the past three months despite the EU exiting the winter heating season with a record-high level of gas still in storage.
The price move higher during the so-called shoulder season when household gas demand is low was the result of concerns about supply disruptions and an uptick in Asia’s LNG imports due to lower spot prices and heat waves in parts of China as well as India and other Southeast Asian countries.
The stronger pull of LNG to Asia has left Europe with fewer imports in the spring, and the major surplus in European gas storage levels, while still at a record high and well above seasonal averages, has narrowed since the end of the winter heating season.
Risks to Europe’s gas supply remain, as the most recent spikes in the continent’s benchmark prices have shown.
Europe will likely fill up its storage sites ahead of its self-imposed November 1 deadline for a second consecutive year, analysts say. But concerns about another cut-off in the remaining supply from Russia and unplanned outages in Norway—now Europe’s single largest gas supplier—will keep the markets on edge and prices elevated toward the end of this year.
Record Storage Surplus Narrowing
The EU’s gas storage sites were 72.3% full as of June 11, according to data from Gas Infrastructure Europe.
Refilling season has started, and the EU has raised its gas in storage levels from 58% at the end of the winter, which was in itself a record-high level of available gas for the end of a heating season, thanks to a milder winter and muted demand from industry.
Now that the refill season is in full swing, it has been an unusually slow start to the pace of refilling, the second-slowest since 2012 and well below the ten-year seasonal average, according to data compiled by Reuters market analyst John Kemp.
The surplus of gas stocks, compared to the ten-year average, has narrowed by early June compared to the end of the heating season on March 31.
That said, storage levels continue to be well above seasonal averages, and it is likely that Europe will hit its full-storage target well in advance of the November 1 deadline.
However, the slower-than-usual build-up of natural gas inventories has put upward pressure on European prices, which have also reflected risks to supply from Norway and Russia in recent weeks. Asia is also increasing competition for LNG supply as heat waves scorch south and Southeast Asia, diverting cargoes away from Europe.
Supply Risks Lift European Gas Prices
This month, Europe’s benchmark natural gas prices have already jumped on two occasions as the market feared supply shocks.
First, the Dutch TTF Natural Gas Futures, the benchmark for Europe’s gas trading, surged by 10% on a single day in early June to the highest level in six months, as supply from Norway crumbled amid unplanned outages.
The Sleipner hub offshore Norway was shut down, which also stopped operation at the Nyhamna onshore processing plant for several days. The Sleipner Riser offshore hub is a connection point for pipelines connecting the Nyhamna plant on the west coast of Norway with the Easington terminal in the UK.
The unplanned outage highlighted the vulnerability of Europe relying on natural gas imports as Norway became Europe’s top gas supplier after the Russian invasion of Ukraine and the slump in Russian gas exports to the EU.
Uncertainty about the remaining Russian gas supply via pipelines to Europe also lifted the gas prices at the Dutch hub this week.
Prices jumped by 3% on Wednesday morning after German energy giant Uniper terminated its Russian gas supply contracts, leaving the market concerned about the remaining flows of gas from Russia to Europe.
The announcement from Uniper and the recent warning from OMV that Gazprom could halt gas supply to Austria due to a foreign court ruling that could interrupt OMV payments to Gazprom Export, rekindled concerns about whether Russian supply would be further limited by Gazprom.
Higher Asian Prices Could Accelerate European Refill
But as prices in Europe have jumped by 40% in three months and Asia’s spot LNG prices hover around six-month highs, the higher Asian prices could create headwinds to Asia’s LNG demand growth in the near term, Wood Mackenzie said in a report this week.
“Lower European demand has depressed prices and pushed LNG into Asia with imports to China alone up 22%,” said Lucy Cullen, Research Director, EMEA Gas & LNG Research at Wood Mackenzie.
“Looking ahead, high prices are likely to provide some headwinds to near-term Asian demand growth. As a result, European storage levels remain on track to reach full capacity by the end of September and stay that way through October,” Cullen added.
Yet, Europe still faces supply risks, the greatest being Russian gas supply, “whether this be via an early cut of transmission via Ukraine or as a consequence of pending arbitration proceedings between European energy companies and Gazprom.”
Moreover, unplanned or extended Norwegian maintenance is set to play a more significant role in Europe’s gas prices and pace of filling up storage, as Norway is now Europe’s biggest gas supplier, WoodMac’s Cullen said.
By Tsvetana Paraskova for Oilprice.com