European gas rebounds with demand in focus after recent slump
As Futures Benchmark As On Erasing Earlier An 11% Jumped Decline Much Friday,
European natural gas prices rebounded as traders weighed the risk of demand picking up in some industries following a recent slump.
Benchmark futures jumped as much as 11% on Friday, erasing an earlier decline. While storage levels in the region are far above seasonal norms and imports of liquefied natural gas continue, a current cold spell is raising consumption.
Traders are also closely watching competition with Asia for the fuel as the global market remains tight. Prices earlier were poised for a sixth weekly loss, the longest such stretch since February 2020.
Mild weather this winter has helped to keep stockpiles high, leading some politicians to suggest the worst of Europe’s energy crisis is over. However, there are concerns fuel usage might start to recover after prices slumped to a 16-month low earlier this week.
“While the healthy storage and ongoing plentiful LNG situation is pushing the market lower, we are hitting resistance from potential industrial demand kicking back-in,” said Tom Marzec-Manser, head of gas analytics at ICIS in London.
He noted that ammonia production in Europe is now profitable again, which could lead to greater consumption. Europe’s storage is designed to smooth out seasonal variations in consumption not to provide a strategic stockpile to protect against an embargo disrupting supplies.
Combined gas consumption in the EU and UK was around 5,203 terawatt-hours (TWh) in 2019, the last full year before the pandemic, according to Eurostat. They have enough capacity to store 1,129 TWh, equivalent to about 21% of annual consumption, according to Gas Infrastructure Europe.
In practice, storage depletion supplies a much smaller share of actual consumption each year, typically around 10%. Seasonal storage is designed to absorb excess production during summer, discharging during winter to meet peaking consumption.
Using inventories to shift supply from summer to winter in this way is more cost-effective than maintaining lots of extra production capacity that would only be used a few months each year.
Inventories are large enough to cope with the unpredictability of winter heating demand and ensure supply does not run out in the event winter is much colder than average.
But given the relatively small volume of gas that can be stored, the inventory system cannot provide both seasonal and strategic storage at the same time.
“While the outlook has certainly improved, we still expect gas price volatility in the coming months,” analysts at JPMorgan Chase & Co. said in a note Friday. “The market should not become too complacent given the warm weather so far this winter," they continued.
Dutch front-month futures, Europe’s gas benchmark, traded 10% higher at €67 a megawatt-hour by Friday evening in Amsterdam, heading for the first weekly advance since early December. UK-equivalent futures jumped 11%. German front-month power was up 2.4%.