Europe's record gas inventories continue to climb even higher as a warm start to autumn delays the onset of heating demand while high prices discourage industrial use and encourage continued imports.
But prices for gas delivered at the height of winter in January 2024 have started to slide as the record levels of inventory weigh on the market.
Prices for January 2024 fell below 47 euros on Nov 6 from more than 57 euros 10 trading days earlier as traders anticipate winter weather may not be enough to prevent a record carryover of stocks at the end of March 2024.
Inventories across the European Union and United Kingdom hit a record 1,146 terawatt-hours (TWh) on Nov 5, according to Gas Infrastructure Europe.
Stocks were 189 TWh (+20% or +1.96 standard deviations) above the prior 10-year seasonal average and the surplus had increased from 168 TWh (+18% or +1.70 standard deviations) on Oct. 1.
Part of the reason is that Northwest Europe has experienced a mild start to the autumn with temperatures at Frankfurt in Germany 3.5°C above the long-term average in September and 2.5°C in October.
At the same time, futures prices and calendar spreads have remained strong, despite record stocks, discouraging resumption of industrial use and encouraging continued imports of liquefied natural gas (LNG).
After-adjusting for inflation, front-month futures averaged 47 euros per megawatt-hour (88th percentile for all months since the start of the century) in October up from 30 euros (61st percentile) in July.
In real terms, front-month prices were around 2.5 times higher than the five-year average for 2016-2020 making spot gas purchases very expensive.
Most industrial users buy on contracts linked to calendar average prices but even the futures strip for 2024 averaged 52 euros in October up from less than 20 euros before Russia’s invasion of Ukraine.
The persistence of high spot and forward prices have ensured industrial gas use remains well below pre-invasion levels.
Europe's storage sites were 99.6% full on Nov 5, a record for the time of year, or any time of year, and gas has continued to be added later than usual owing to the warm weather.
Between 2012 and 2022, the median date on which storage peaked was Oct. 26 but this year it was still climbing as late as Nov. 5, making it one of the latest fills on record.
Over summer, calendar spreads weakened significantly and the market moved into a significant contango to encourage more consumption and limit the inventory build.
Since then, however, spreads have strengthened as traders have been able to store extra gas in Ukraine and on LNG carriers off the coast to avoid storage space running out.
More recently, conflict in the Middle East and the possible disruption of gas imports has helped keep European prices high.
Europe still needs to conserve gas this winter but given how much is now in storage there is almost no chance stocks will fall critically low whatever the weather.
Based on the current storage level and historical depletions over the last decade, inventories are projected to fall to around 575 TWh before the end of winter 2023/24 leaving storage sites 50% full.
At this early point in the winter heating season, there is still significant uncertainty about average temperatures and the amount of depletion ahead.
But even with a very cold winter, inventories are very unlikely to fall below 368 TWh (32% full), and if the winter is mild they could end as high as 795 TWh (69% full).