John Kemp: Gas price slide allows power generators to lock in much lower costs
Europe’s gas inventories are on course to end the winter at or near a record high as mild temperatures across the continent fail to erode the enormous surplus inherited from last winter.
Inventories across the EU and Britain amounted to 996 terawatt-hours on December 31, a seasonal record, according to data compiled by Gas Infrastructure Europe. Stocks were above the prior 10-year average and the surplus had swelled since the so-called heating season started in October.
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 were 2.3 degrees Celsius above the long-term average between October and December and temperatures in London airport were 1.1 degrees above the seasonal average in the final three months of last year.
As a result, gas storage sites were still over 86% full at the end of December, down from a peak of 99% in November, but the second highest on record.
Based on weather patterns and depletion rates over the last 10 years, inventories are projected to end the winter at 616 terawatt-hours. The central projection would be the second-highest carry-out on record and almost as high as at the end of last winter.
There are now no scenarios in which Europe’s inventories will become uncomfortably low before the end of this winter. In fact, EU and UK storage sites are likely to end the winter almost 54% full.
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.
After 18 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 this month fell to an average of just €36 per megawatt-hour in December down from an average of €52 in October.
Real prices are still high but are no longer exceptionally so — as they were in October. Real prices are still somewhat above the five year average of €21 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 contracts allowing utilities, industrial users and generators to lock in prices for the year ahead at €34, down from €52 in 2023 and €117 in 2022.
But prices will continue trending lower until there are signs of energy-intensive industrial users restarting some of the capacity idled last year.
In Germany, for example, energy-intensive manufacturing production was still 18% lower last October than in January 2022. Some of that demand will have to be recovered for prices to find a steady level.
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