Europe’s mild winter leaves gas stocks at record high

Europe is on track to end the winter with a record volume of gas in storage, which has pushed futures prices back to pre-crisis levels once inflation is taken into account.

The supply picture has been transformed from two years ago, when traders and policymakers were worried about possible gas shortages following Russia’s invasion of Ukraine.

Storage facilities across the European Union and the United Kingdom were 62% full on 5 March compared with an average of 41% full on the same date between 2011 and 2020.

Inventories amounted to 707 terawatt-hours (TWh), which was 277 TWh (+64% or +2.14 standard deviations) above the prior ten-year seasonal average.

The surplus had swelled from 167 TWh (+18% or +1.70 standard deviations) at the start of the winter heating season on 1 October.

Winter 2023/24 has mostly been characterised by a strong positive North Atlantic Oscillation, directing strong westerly winds from across the Atlantic into Northwest Europe.

Pressure differentials between the Greenland-Iceland low-pressure area and the Bermuda-Azores high-pressure area have been greater than normal, accelerating warm, moist air into Northwest Europe.

The result has been higher temperatures and wind speeds than average, reducing heating demand and at the same time boosting wind generation, creating a double cut to gas consumption.

So far this winter, heating demand has been 14% below the long-term average in London and 25% below the average at Frankfurt in Germany.

Inventories are on track to end winter around 664 TWh, setting a record and beating previous highs of 629 TWh at the end of winter 2022/23 and 609 TWh at the end of winter 2019/20.

Northwest Europe is about 80% through the heating season so any cold snaps are unlikely to make a significant difference to the outcome at this point.

It is the region’s second mild winter in a row. Europe has been lucky as well as smart.

High prices and government policies to reduce gas and electricity consumption have played a role averting shortages, but back-to-back mild winters have played a bigger role securing energy supplies.

Since October 2023, futures prices have declined steadily to encourage more consumption and limit accumulation of excess inventories.

Inflation-adjusted front-month futures prices fell to an average of just 26 euros ($28.40) per megawatt-hour in February down from 46 euros in October 2023 and a record 245 euros in August 2022.

Front-month prices have reverted close to the pre-crisis ten-year average between 2011 and 2020 of €23 in real terms.

Lower prices should eventually encourage energy-intensive manufacturing industries that idled plants in 2022 and 2023 to restart some of them.

Major industrial users mostly hedge gas purchases in the forward market, where year-ahead prices have fallen to an average of around €30-31 per megawatt-hour so far in 2024.

Year-ahead prices are not vastly higher than the pre-crisis average for 2011-2020 of €26 once adjusted for core inflation.

It will take longer for the decline in wholesale costs to filter through to retail prices for gas and electricity but households and small businesses should see prices decline before winter 2024/25.

Lower prices are already directing more liquefied natural gas cargoes to price-sensitive customers in East and South Asia that were unable or unwilling to compete with wealthier users in Europe during 2022/23.

Prices need to fall far enough for long enough to purge some excess inventory and make room in the storage system for the accumulation of inventories during the summer of 2024.

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