Europe’s Gas Dilemma Gets More Acute as Storage Season Starts

bit{s3skky4a4apb()q2l0)u_media_dl_1.png ICE, Bloomberg

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(Bloomberg) — After a torrid month in which European gas prices surged, plunged and surged again on the war in the Middle East, traders now face a dilemma.

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When gas stockpiling season begins in April, governments are keen for traders to make an early start refilling severely depleted storage tanks. But the gap between summer and winter gas prices is telling them to wait.

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This is the choice: Lock in costly supplies right away to secure fuel for next winter — a trade that’s currently unprofitable — or wait until prices become more favorable.

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For now, traders say they are largely staying on the sidelines, heeding the financial incentives set by futures contracts as political uncertainty clouds the duration of the Middle East conflict and its impact on energy flows.

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“In that environment, price becomes the primary allocation mechanism,” said Anders Porsborg-Smith, managing director and senior partner at Boston Consulting Group. “Europe can secure volumes, but potentially at a significantly higher cost.”

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From April until the end of October, when temperatures are higher and gas consumption is lower, countries normally replenish their storage sites in preparation for next winter. It’s typically a profitable activity, since gas bought cheaply in the warmer months can be resold at higher prices when it’s cold. That premium can even be locked in immediately using futures contracts for summer and winter.

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But with just days to go until the start of the injection season, the spread between summer and winter gas is still too narrow to lock in a profit. The disruption to liquefied natural gas supplies caused by the war in the Middle East — with both immediate and long-term impacts — makes it unclear when storage injections will make economic sense.

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Iran’s blockade on most energy flows through the Strait of Hormuz has halted LNG supplies from Qatar to customers across the world. A missile attack also knocked out about 17% of the emirate’s production capacity for several years. 

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This raises the prospect of strong competition between Europe and Asia for a dwindling pool of LNG cargoes, pushing up prices for anybody who wants to secure supplies right now.

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“Depending on views as to the likely duration of the conflict and Strait closure, European buyers might seek to hold off discretionary purchases and adopt a wait-and-see approach,” said Daniel Reinbott, a partner at law firm Baker Botts’s projects and energy practice.

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Five traders in the region, who spoke on condition of anonymity, told Bloomberg that they were doing just this. The market is not there yet and they won’t start filling storage unless they have to, they said. 

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Depleted Tanks

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The challenge of refilling storage this year will be significant. Across Europe, inventories are near 28%, the lowest for this time of year since 2022. Dutch facilities are roughly 6% full, while in Germany, home to the region’s biggest sites, inventories are also much lower than usual at about 22%.