Europe’s gas prices soften as rate of storage build is unsustainable

Europe's gas storage is filling at the fastest rate on record as the region attempts to buy as much as possible as quickly as possible before next winter to reduce its vulnerability to any disruption of supplies from Russia.

But the rate of inventory accumulation has become unsustainable, which is putting downward pressure on nearby futures prices, a signal to slow the rate of stock additions.

With Europe on course for very full storage before the end of September, the region's buyers are likely to become less aggressive, leaving more LNG to be sent to Asia in the next few months.

Since the end of March, European Union and United Kingdom (EU28) gas storage has risen by 164 terawatt-hours (TWh) compared with a ten-year average increase of just 107 TWh.

By May 18, the volume of gas in storage was slightly above the ten-year average (+2 TWh) up from a large deficit at the end of January (-134 TWh).

But with storage already above average, inventories cannot continue accumulating at such a rate without threatening to overwhelm available capacity.

Futures prices for deliveries this summer are already softening to slow storage additions and encourage more consumption by industrial users and power producers.

Benchmark futures for deliveries scheduled in July 2022 have fallen close to their lowest since Russia's invasion of Ukraine in late February.

The summer-winter spread between July 2022 and January 2023 has slumped into a contango of almost €2 per megawatt-hour down from a record backwardation of €72 in early March.

Prices for deliveries to Northwest Europe are still significantly above those for Northeast Asia, drawing more LNG cargoes, but the regional premium has started to narrow as well.

Exceptionally high prices for the last six months have rebalanced Europe's gas market and if they continue will leave it with a very large surplus within the next two months.

Plentiful storage will ensure Europe is comfortably supplied through next winter, even if temperatures are unusually cold ― provided deliveries from Russia continue.

Unlike the strategic petroleum reserves held by the United States and its allies, seasonal gas storage is not designed to cope with a significant and sustained disruption of pipeline deliveries.

Even if storage is filled to maximum capacity, it will not be enough to protect Europe from extremely high gas prices and massive economic disruption if deliveries from Russia are halted next winter.

Provided pipeline flows continue, however, the volume of gas now being put into storage should ensure inventories are far more comfortable next winter than they were last winter and prices will continue to fall.