Europe’s gas price falls to encourage more industrial use: Kemp
LONDON, Jan 4 (Reuters) - Europe’s gas inventories are on course to end the winter of 2023/24 at or near a record high as mild temperatures across the region fail to erode the enormous surplus inherited from the winter of 2022/23.
Inventories across the European Union and the United Kingdom amounted to 996 terawatt-hours (TWh) on Dec. 31, a seasonal record, according to data compiled by Gas Infrastructure Europe (GIE).
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Stocks were 229 TWh (+30% or +1.97 standard deviations) above the prior ten-year average and the surplus had swelled from 167 TWh (+18% or +1.70 standard deviations) since the heating season started on Oct. 1.
Northwest Europe, the principal consumption area, experienced much warmer-than-normal temperatures in the final three months of 2023, suppressing heating demand and gas use.
Temperatures at Frankfurt in Germany were 2.3 degrees Celsius above the long-term average between October and December (exceeding the average on 67 of 92 days).
Temperatures at London’s Heathrow airport were 1.1 degrees above the seasonal average in the final three months of 2023 (exceeding the average on 61 of 92 days).
Across the region, temperatures were especially mild during December, causing a very small depletion in inventories over the course of the month.
As a result, gas storage sites were still 86.5% full at the end of December, down from a peak of 99.6% in November, but the second highest on record, and 15 percentage points higher than the ten-year seasonal average.
Based on weather patterns and depletion rates over the last ten years, inventories are projected to end the winter at 616 TWh, with a likely range of 481-792 TWh.
The central projection would be the second-highest carryout on record and almost as high as at the end of winter 2022/23.
There are now no scenarios in which Europe’s inventories will become uncomfortably low before the end of winter 2023/24.
In fact, EU and UK storage sites are likely to end the winter almost 54% full, with a likely range from 42% to 69%.
Prices remain well above the long-term average and industrial gas consumption is still depressed so storage is more likely to end up towards the upper half of the range.
Exceptionally high storage would leave little room to absorb more during the summer 2024 refill season when the global gas market will be in surplus.
RESTORING (SOME) DEMAND
After eighteen months of scarcity pricing between mid-2021 and the end of 2022, caused by Russia’s military action against Ukraine, Europe finds itself in the unusual position of needing to encourage more gas consumption.
Futures prices have already started to fall sharply and persistently to incentivise more consumption and purge some of the excess inventories.
Prices for gas to be delivered in January 2024 fell to an average of just 36 euros per megawatt-hour in December down from an average of 52 euros in October.
Inflation-adjusted prices for the nearest delivery month have fallen to an average of less than 32 euros so far in January from almost 47 euros in October.
Real prices are still high (68th percentile for all months since 2010) but are no longer exceptionally so - as they were in October (88th percentile).
Real prices are still somewhat above the five year average of 21 euros between 2015 and 2019, before Russia’s invasion of Ukraine in 2022 and the coronavirus pandemic in 2020.
But they no longer signal the need for extreme conservation by households, commercial users, industry and power generators.
The fall is expected to persist, with the calendar strip of futures contracts allowing utilities, industrial users and generators to lock in prices for the year-ahead at 34 euros, down from 52 euros in 2023 and 117 euros in 2022.
But prices will continue trending lower until there are signs of energy-intensive industrial users restarting some of the capacity idled during 2022/23.
In Germany, for example, energy-intensive manufacturing production was still 18% lower in October 2023 than in January 2022.
Some of that demand will have to be recovered for prices to find a steady level.
John Kemp is a Reuters market analyst. The views expressed are his own.