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Gas prices continue to drop following mild winter

European gas prices continue to decline, with natural gas futures dropping below €50/Mwh for the first time in 18 months. Overall, prices have fallen by more than 80% from their peak in August following relatively warm winter weather, initiatives to reduce energy consumption and the increased import of LNG from abroad to compensate for the loss of Russian gas. As a result, the region is currently expected to end this winter season with its gas storage levels well above the five-year average of 33% full.

In the coming weeks, it is expected that the European Commission will consult member states over whether to extend emergency measures and consumption targets to reduce gas demand, many of which are set to expire in March. According to some estimates, the European Union’s bill for securing energy supplies and protecting customers from price hikes reached €768 billion by the end of January, nearly as much as the bloc’s COVID-19 recovery fund.

Meanwhile, warning signs linger over the supply of gas for next winter. Current gas futures contracts show that prices will likely increase throughout the year, possibly reaching a higher-than-normal €60/Mwh by December. The supply of LNG may be harder to maintain in 2023 as more buyers in China and the rest of Asia return to the market which could divert shipments away from Europe. Although higher storage levels will make it easier to refill before next winter, the speed at which authorities decide to replenish storages will impact prices in the coming months. A rapid approach by authorities may push prices higher in the spring, making it harder for governments to end financial support programs.

Gas storage remains at record levels

At almost 65%, European gas storage facilities remain far above their average levels compared to previous years, with many in the region now beginning to focus on what the next winter may bring. By November 2023, the EU expects member states to reach 90% of storage capacity, a difficult target without imports from Russia and amid growing competition with LNG buyers from Asia. However, some hope that the Freeport LNG terminal in Texas, which resumed exports in mid-February following a prolonged operational halt due to a fire last summer, may serve as an additional supply source. The terminal represents around 15% of all LNG export capacity in the U.S., with around 70% of its supplies going to European customers prior to the shutdown.

Others suggest that maintaining consumption cuts until at least October could alleviate the risk of supply shortages later in the year. However, for many countries, the drive to decrease gas consumption is proving difficult.

Colder than normal March possible following milder winter season

So far, the core winter months of December, January, and February have been distinctly warmer than normal. Looking ahead, Everstream’s Applied Meteorology team sees signals that the probability of anomalous late winter colder temperatures will increase into March. The Polar Vortex has recently become unstable and will remain unstable into and throughout March. An unstable Polar Vortex sends more Arctic air into the middle latitudes. The location of this cold flow in the Northern Hemisphere remains uncertain; however, an unstable Polar Vortex raises the probability of colder-than-normal temperatures across Europe in March. The end of February and first few days in March will feature a more variable temperature pattern, which will result in closer-to-normal energy demand.

Everstream clients are receiving more detailed insights and recommendations about this risk.

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