The northern hemisphere experienced its warmest October and November in records dating back to the 1880s – pushing the gas market into a large surplus and triggering a slump in prices.
Northern hemisphere land temperatures were 2.61°C above the long-term seasonal average in October and 3.04°C above the seasonal average in November.
Temperature anomalies smashed previous records of +2.04°C for October (2021) and +2.48°C for November (2020), according to records complied by the U.S. National Oceanic and Atmospheric Administration.
Anomalies were the third-highest in November and sixth-highest in October in over 1,700 months since 1880.
Europe experienced near-record warmth in October, though temperatures were more in line with recent years in November. North America experienced near-record warmth in both months.
But it was in Asia where temperatures were truly exceptional with record warm anomalies in both October (+2.76°C) and November (+3.14°C).
ABUNDANT GAS STOCKS
Record temperatures extended the gas storage refill season much later than usual and delayed the onset of the winter drawdown.
In the European Union and United Kingdom, inventories totalled 1,095 terawatt-hours (TWh) on Nov. 30, a seasonal record.
Region-wide inventories were +201 TWh (+23% or +1.93 standard deviations) above the prior 10-year seasonal average.
Gas storage sites were still more than 95% full compared with a prior 10-year seasonal average of 83% at the end of November.
Medium-range forecasts show Europe’s temperatures are expected to be above average between December and February which will reduce gas consumption.
In the United States, working inventories in underground storage amounted to 3,736 billion cubic feet (bcf), which was the highest since 2020 and before that 2016.
Working inventories were +129 bcf (+4% or +0.46 standard deviations) above the prior ten-year seasonal average.
Stocks remained plentiful even though futures prices have been very low throughout the year encouraging consumption by power generators.
At the recent peak in October, front-month prices still averaged just $3.16 per million British thermal units, in only the 14th percentile for all months since the start of the century, after adjusting for inflation.
Moreover, strong El Niño conditions in the central and eastern Pacific Ocean are forecast to produce a much milder than average winter across the northern United States.
El Niño conditions are among the most pronounced for the last 40 years and expected to cut nationwide heating demand by around 7% compared with the long-term average.
PURGING THE EXCESS
By the middle of October, the high level of inventories, persistent warmth across the northern hemisphere, and forecasts for a warmer-than-average winter across North America and Europe started to weigh on prices.
In northwestern Europe, futures prices for deliveries in the peak winter demand period in January 2024 slumped from an average of €52 per megawatt-hour in October to €47 in November and €38 so far in December.
In the United States, prices for deliveries in January 2024 have slumped from $3.70 per million British thermal units in October to $3.25 in November and $2.54 in December.
Real month-ahead gas futures prices are now in just the 5th percentile for all months since the start of the century providing the strongest possible signal to trim production and boost gas use.
Even in northeast Asia, which relies most heavily on long-distance LNG imports, futures have slipped from $17.31 per million British thermal units in October to $15.85 so far in December.
Around the world, exceptionally high prices for most of 2022 and early 2023, coupled with consecutive warm winters in 2022/23 and 2023/24 in Europe, have left the major consuming regions with excess gas in storage.
With storage still almost full, some of the excess will have to be purged before the end of winter 2023/24 to create space to absorb the normal seasonal surplus and refill during summer 2024.
Prices are therefore slumping to force a slowdown in production, especially in the United States, and encourage more consumption by power generators and industrial users, especially in Europe.
John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X.
(Editing by Tomasz Janowski)