Europe has ended a mild and windy winter with a record volume of gas in storage – eliminating the threat of shortages that has hung over the market since Russia’s invasion of Ukraine in 2022.
Now the problem is where to put all the seasonal surplus of gas this summer – with very little storage space unused across the European Union and the United Kingdom.
Storage is at near-record levels in the U.S. as well, so more will have to be stored in Ukraine or sold to price-sensitive customers in South and East Asia.
Stocks across the EU and the UK amounted to 670 terawatt-hours (TWh) on March 31, according to data from Gas Infrastructure Europe.
Inventories were at a seasonal record high and 276 TWh (+70% or +2.03 standard deviations) above the 2014-2023 average.
Storage facilities were still 58% full compared with an average of just 36% on the same date over the previous 10 years.
With mild and very windy weather across Northwest Europe since the start of April, inventories have already begun to rise.
Stocks had increased by 14 TWh, or an average of 2 TWh per day, by April 7 as the summer refill season got off to an unusually fast start.
Based on seasonal storage patterns over the last decade, inventories are on course to reach 1,284 TWh before the start of the next winter drawdown, with a likely range spanning from 1,134 TWh to 1,463 TWh.
But the EU and UK only have space to store 1,139 TWh, so almost all of these storage scenarios are physically impossible.
There was just 469 TWh of unused storage capacity on March 31; the EU and UK have always added more than this over the last 10 years.
Storage facilities are likely to become 90% full by the middle of August – long before the winter depletion starts in late October or early November.
So Europe will need an unusually small refill, the smallest in more than a decade, to ensure space does not run out before winter 2024/25 begins.
Stocks are also bloated in the U.S., almost 192 TWh, or 40%, higher than average for the end of winter, which limits storage options in North America.
Ukraine has offered some unused storage space in the west of the country (away from the main fighting) to utilities and traders to store gas for European customers.
But it is likely the market will need some combination of slower production growth, increased consumption, and storage options in Asia.
In the U.S., futures prices have fallen to their lowest levels in more than three decades, once inflation is taken into account.
Drilling rates have already started to slow and should filter through into slower production growth or even declines later in the year.
In Europe, nearby futures have fallen back to the pre-invasion average in real terms, encouraging more consumption, especially by energy-intensive businesses.
Germany’s energy-intensive manufacturers, a sector including steelmaking, ceramics, glass, paper, and chemicals, increased output more than 8% in the first two months of 2024 in response to cheaper gas and electricity prices.
Lower prices will also incentivise more gas combustion by power producers in both the U.S. and Europe at the expense of coal.
Nonetheless, more gas will need to be sold to customers in East Asia (China, Japan, Korea and Taiwan) and South Asia (India, Pakistan and Bangladesh).
Asia’s consumption is much more price-sensitive and gas must compete with local coal as well as hydro, wind and solar generation.
Prices will have to remain near or below the long-term real average to encourage absorption and limit the build-up of excess stocks elsewhere.
John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X
(Editing by Paul Simao)