Sell or Store: Europe’s Dilemma for Gas Reserves

This is expected to be a cold winter for companies storing natural gas in order to profit from high prices in Europe. Supply has been reduced and colder weather will eventually drive demand. However, the recent dramatic drop in wholesale prices is turning the sector’s economics upside down, Bloomberg reported.

Filling storage spaces before the winter season has been successful, and many are now close to capacity, but some suppliers may now want to hold onto those reserves until they can sell their stored gas at more attractive prices. Such a move would raise market prices and further harm the European economy, which is already heading into recession, largely due to the impact of the Russian invasion of Ukraine on energy markets.

Gas is usually injected into storage by utilities and energy traders during the summer when prices are lower and sent back to the market in winter when they rise. This year, contracts have gone in the opposite direction. This means that some operators, particularly in Germany, the largest gas consumer in the region, could lose money selling stored fuel that is used to compensate for supply disruptions.

‘Companies will buy gas a day in advance’

Fuel prices this summer occasionally peaked at around 340 euros per megawatt-hour. Benchmark winter contracts are now selling for half that, closer to 140 euros.

– This is a real problem. It can probably only be resolved if some of the recently nationalized players resell the expensive gas they bought at a loss – said Henning Gloystein, director of energy, climate, and resources at Eurasia Group in London.

If stocks are held back for any reason, there remains only one source of gas, which is daily supplies, coming from liquefied natural gas tankers from the U.S. or Qatar or pipelines from Norway and North Africa. The continent, we remind, is already relying on these flows. Any additional demand for daily quantities is likely to raise prices again after a brief relief, keeping energy bills at staggering levels.

– To optimize their portfolios, companies will buy gas a day in advance rather than pulling gas from storage as long as they can maximize profit – said Leon Izbicki, gas analyst at Energy Aspects.

The costs of insuring European gas reserves are climbing into the tens of billions of euros this year. Although traders often sell gas in advance to protect themselves from risk, they could still incur losses due to price differentials. This is particularly challenging for utilities and traders who heavily rely on long-term contracts with Russia, which met 20 percent of gas demand in the European Union last winter.

German Problems

Europe has increased storage, but only about ten percent of gas is under the direct control of public officials through national strategic reserves, according to data collected by Bloomberg.

Part of the fuel purchases during the summer were made by companies using state subsidies, particularly in Germany. The government approved 15 billion euros for Trading Hub Europe, which manages the German gas market, for the purchase of fuel for storage. The group purchased about 60 terawatt-hours of gas, equivalent to about 25 percent of the storage capacity in the country.

To avoid supply risks, governments may also seek to declare a state of emergency. In that case, German and other state bodies would have the authority to order the release of reserves.

Germany has enacted a law that sets targets for gas storage. It has already reached the target of 95 percent by November 1 and mandates a level of 40 percent by February 1. We remind that facility operators risk penalties if they fail to meet these levels.

The Calm Before the Storm

Benchmark commodity futures have lost about 70 percent of their value compared to peaks in August due to an unusually warm October that slowed demand and delayed the withdrawal of gas from storage. There are also large stocks of LNG. Europe even faced a temporary supply shortage but must keep its prices above those in Asia to win competition for LNG cargoes.

Given how tight the global gas market is with lost Russian volumes, most industry observers believe it is a question of when, not if, prices will rise again.

Temperatures are already forecasted to drop slightly below normal by mid-November, according to the Weather Company.

– Cold weather, reduced demand, or LNG flows below expectations could cause prices to return to higher levels – said BloombergNEF analyst Stefan Ulrich.

– It seems that for utilities it is worse to be caught in a gas shortage, especially considering the state support for purchases, than to accept losses on the portion of gas they stored at higher prices – he concluded.