Despite European natural gas stocks being drawn down to record low levels at the end of the past winter and concern over storage economics this summer, injections have been strong, with stocks almost back to the same level as in 2017. Stuart Elliott, senior writer for European gas at S&P Global Platts, looks at the drivers of the European storage recovery and what to expect ahead of the coming winter.
European natural gas injections show strength after record drawdown
By Stuart Elliott, senior writer, European gas
Welcome to The Snapshot – our series examining the forces that determine global commodities markets.
The topic of gas storage in Europe is normally relegated to the back pages of industry publications and to the last afternoon of industry events.
But this past winter saw storage play a critical role in keeping Europe warm during the extreme cold brought to the continent by the “Beast from the East”.
European storage stocks were drawn down to record lows, with stocks in the EU falling to just 18 Bcm, or 18% of capacity, by the end of March as prices soared.
On February 28 -- one of the coldest days of the winter -- a massive 1.1 Bcm was withdrawn from storage in the EU, while in Germany, more than half of its total consumption was met by storage withdrawals on that day.
Clearly, storage came to Europe's rescue when it needed it the most.
But at the same time, concerns began to surface about whether the spread between European Winter 18 gas contracts and Summer 18 contracts -- traditionally the tool used by traders to make money out of storage -- was wide enough to incentivize large-scale summer injections.
Buying gas for storage injection in the summer when it is normally cheaper and withdrawing in the winter when it is usually more expensive has been the mainstay of European storage economics.
But in recent years, contracts for buying forward gas for summer delivery tend not to be priced at much of a discount to winter gas.
In fact, because stocks were drawn down so far at the end of the past winter, the subsequent anticipated demand for gas in the summer to replenish stocks pulled up the summer price, while the corresponding winter 18 price rose much less, narrowing the spread even further.
There was real worry that storage sites would not be filled to guarantee supply for the next winter.
But, in reality, injections since April 1 have been surprisingly strong, and stock levels have almost caught up to last year's levels already.
So what's the story?
Well, there are several likely explanations.
First, while the winter-summer spread on the dominant Dutch TTF hub remains at less than Eur1/MWh, according to Platts price assessments, it is still high enough to cover storage costs on a short-run variable cost basis.
According to Platts Analytics, some of the largest European facilities -- for example Rehden in Germany and Bergermeer in the Netherlands -- have variable costs well below the current spread.
Secondly, it is also likely that significant storage capacity was booked by shippers who forward bought gas ahead of the cold spells in March this year, hedging their forward positions, when the winter-summer spread was much higher at more than Eur2/MWh.
The "Beast from the East" was well flagged by weather forecasters, giving traders plenty of opportunity to buy the summer contract before the prompt prices spiked when the weather actually arrived.
Thirdly, there is also the subject of "implied volatility" to consider -- there has been an increase in volume of trading activity taking place in the forward market in anticipation of possible unforeseen events this winter that would push prices much higher.
If last winter is anything to go by, traders could be wise to wait and see what might happen, in the hope of a price spike, and sell gas from storage then to make the most of shorter-term price volatility.
So it appears increasingly likely that come next winter, Europe will have been able to stockpile enough gas to see it through the season -- even if cold weather does, again, take hold over the continent.
Until next time on The Snapshot, we’ll be keeping an eye on the markets.