FEATURE: European gas storage levels in sharp focus ahead of tight winter

With EU gas storage sites currently only 55% full, concern that stocks won't reach a suitable level ahead of the winter has played a big part in pushing European gas prices up to the giddy heights of Eur40/MWh.

Low stocks -- combined with strong competition from Asia for LNG and constraints in Russian gas flows to Europe via Ukraine -- have contributed to the current market tightness.

A key question -- and one likely to continue to drive market fundamentals -- is how full European storage sites will be by the start of the withdrawal season and whether stocks will suffice to carry Europe through another cold winter.

According to S&P Global Platts Analytics' forecasts, northwest European storages are expected to reach 85% full by the end of October, below the five-year low of 86%.

Stocks are forecast to reach 90% full in Italy, but just 78% full in central and eastern Europe.

"This winter is going to be very tight," Platts Analytics managing analyst James Huckstepp said.

Huckstepp said a normal winter would likely mean stocks would see Europe through, but "given that there isn't any clear upside to supply we should really be preparing for another cold winter."

2019, 2020 cycles

The past two storage cycles in Europe have been exceptions to the norm.

In 2019, storage stocks were built to close to 100% because of fears that Ukrainian transit could be disrupted from the start of 2020 in the event Moscow and Kyiv were unable to reach a new transit deal.

Then, in 2020, stocks again reached close to 100% because of the significant storage overhang from the previous year, a warm winter and the very low summer prices that incentivized injections.

Previous years saw EU stocks built to lower levels ahead of the withdrawal season, such as 2018 (87% peak filledness), 2015 (84%), and 2013 (86%), according to data from Gas Infrastructure Europe.

The last time stocks fell well short of capacity was in 2018, which Huckstepp said was of concern to the market. "It kept the TTF price above the coal to gas switching channel until LNG started flooding us in November 2018," he said.

The expectation of lower-than-usual stock levels will likely mean a less than comfortable winter.

"It matters for prices which could be maintained at these very high levels into next year," Jonathan Stern from the Oxford Institute for Energy Studies said.

"And I'm not confident with Asian LNG demand roaring away that we're going to get to 80%," Stern said.

Strong buying demand for LNG in Asia has seen the S&P Global Platts benchmark JKM spot LNG price move above $15/MMBtu in recent days.

Gergely Molnar, analyst at the International Energy Agency, said the level of EU gas stocks at the start of the heating season could come in below the five-year average.

"Considering the average net injection rates over the last five years, European storage could start the heating season with inventory levels with a fill rate 17% below the five-year average," Molnar said.

He added that the very tight summer-winter spreads meant net injections could continue to hover below their five-year averages over the next few months.

S&P Global Platts assessed the TTF day-ahead price at Eur39.80/MWh on July 28, a rare summer premium over the front winter contract, which was assessed at Eur38.45/MWh.

Molnar said below average fill rates in October could also weigh on the withdrawal rates next year into late March, especially in the event of a "cold and long" 2021/22 heating season.

Further, he said, "lower than average inventory levels in Europe could result in higher gas import requirements, including LNG, through the winter season, and as such further tightening supply-demand fundamentals both in Europe and Asia."

Russia role

This past winter saw European storage sites drawn down quickly as temperatures plunged, with pipeline supplies from Russia via Ukraine in particular not stepping up to meet the additional demand.

Part of the problem has also been the very low level of stocks held by Russia's Gazprom itself in its European storage sites.

Gazprom Export CEO Elena Burmistrova said in May that withdrawals from the company's own storage sites continued for much longer than usual during the cold European spring.

"Due to strong demand, we didn't inject into storage -- we delivered to offtakers directly," she said. "Traditionally we start injecting in April, but this year we saw withdrawals from storage toward the end of April," she said.

The startup of Nord Stream 2 could help offset the low level of storage, and even be used to counter-seasonally fill storages if it begins operations in October as expected.

"I would not rule out that the injection period will also get longer and go beyond October," Burmistrova said in May.

Gazprom has come in for criticism in recent months for not booking additional capacity via Ukraine to supply more gas to Europe -- in part to help fill storages -- amid sky-high gas prices and a tight market.

But the company has said its focus remains on meeting its European customer obligations.