Europe only has space for a small gas refill in 2023

(Reuters) - Europe needs to put a smaller-than-average volume of gas into storage this year after a mild winter left the region with record high inventories.

The smaller refill requirement is weighing down prices for deliveries this summer, but because limited storage is an imperfect replacement for imports, prices will probably still need to be high next winter to restrain consumption.

As a result, futures prices have moved into an increasingly steep contango to cover storage costs, incentivize more consumption this summer, divert some LNG to other markets, and encourage conservation next winter.

Chartbook: Europe gas storage

The European Union and the United Kingdom have capacity to store around 1,129 terawatt-hours (TWh) of gas, according to data compiled by Gas Infrastructure Europe (GIE).

On April 1, the start of the traditional refill season, storage was 56% full - a record high for the time of year - with inventories of 633 TWh (“Aggregated gas storage inventory”, GIE, April 14).

Over the last ten years, storage increased by an average of +612 TWh from April 1 to the post-summer peak, with annual accumulations ranging from +468 TWh (2014) to +779 TWh (2022).

If storage behaves similarly this year, inventories are projected to reach a post-summer peak 1,245 TWh, with a range of 1,102 TWh to 1,412 TWh.

Since there is only 1,129 TWh of storage available, nearly all of these projected trajectories are physically impossible.

Europe’s storage capacity limit implies it only has room to add one of the smallest volumes of gas in the last ten years.

Deepening contango

Prices and spreads are now moving decisively to limit the amount of gas added to storage this summer.

Prices for gas to be delivered in July 2023, at the height of the refill season, slumped to €48 per megawatt-hour on March 31 from €80 on December 30 and €177 on September 30.

Lower prices will encourage gas-fired generators to run for more hours and energy-intensive industrial users to re-open some plants closed last winter to reduce costs.

Given the limited volume of gas that can be stored, however, high prices will still probably be needed to encourage careful consumption during the winter of 2023/24.

Prices for deliveries in January 2024, usually the coldest winter month, were €60 per megawatt-hour on March 31, a more modest reduction from €84 on December 30 and €174 on September 30.

The result is that the summer/winter calendar spread from July 2023 to January 2024 slumped into a contango of €12 on March 31 from €4 on December 30 and a backwardation of €3 on September 30.

The weakening spread reflects both the increasing abundance of inventories and the rising cost of adding more to them given the shortage of storage space.

Limited refill season

In the short term, cold weather at the start of April has delayed the onset of refilling and eased some concerns about capacity running out.

Inventories are estimated to have reached their post-winter low as early as March 17 compared with a median date over the last ten years of March 30.

But there was no net increase between March 17 and April 6 owing to the arrival of colder weather, effectively postponing the start of the refill season.

The delayed start to refilling probably prevented an even sharper fall in prices and calendar spreads. Nevertheless, storage space is still under pressure.

Refill in 2023 will therefore need to be much slower and end far earlier than in 2022, and one of the lowest on record, which means lower prices and a deeper contango to limit the build up of inventories.

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