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Gas prices drop despite cold snap

Gas prices fell to a 16-month low across Europe this week despite a recent drop in temperatures across the continent. Nevertheless, following an uncommonly warm period since mid-December, gas inventories are on course to end the heating season at the highest level on record at around 54% of full capacity, a much higher rate compared to an average of 35% over the last 12 years.

As inventories remain uncharacteristically high, market prices have fallen to redirect more liquefied natural gas to other parts of the world, encourage consumption in Europe, stem further inventory accumulation in the region and make room in storage facilities that will be needed to absorb excess production during the upcoming summer.

Regardless, it is still too soon to announce the end of the energy crisis for the 2022/2023 winter season, as the same gas that sold for €10 ($11) before the COVID-19 pandemic now costs around €75 ($81) per megawatt-hour on January 11, 2023.

As prices continue to decline, manufacturers in energy-intensive industries including fertilizer, iron and steel, ceramics, glass, and chemicals production, as well as non-ferrous smelters, are likely to restart some idled capacity soon. However, while the risk of enforced rationing might be over, energy prices would need to stay lower for much longer for most companies to see a real long-term difference in the sector.

Nevertheless, companies in energy-intensive industries are still idling production or initiating short-time work procedures to cut costs amid challenging market conditions

Gas consumption stable amidst cold snap

Despite colder temperatures, especially in north-western Europe where gas consumption was the highest in the UK, Belgium, and France, the continent’s gas storage levels remain high overall, with many authorities citing that gas storage levels this winter or even the next are secure. Germany’s Chancellor recently reassured the public that the county’s energy supply for this winter was secure. Similarly, France’s transmission system operator RTE cited that a confluence of factors, including well-filled hydropower and gas storage facilities, above-average wind power generation and a mild winter meant that the French power system is stable following fears of blackouts going into this year’s winter season. Meanwhile, Italy’s largest energy firm Eni SpA stated that the country’s gas supplies should be more secure by next winter as it plans to import an additional seven billion cubic meters of LNG from Algeria in 2023 and 2024.

Energy surcharges continue to increase transportation costs

As a result of higher energy prices, many transportation companies are implementing temporary surcharges to shift costs onto customers.

In most European countries, rail and combined intermodal transport services will see an increase of 16% over the country’s standard inland transport tariff. As a result of rising costs several railway associations have begun pressuring the EU Commission to implement rail-friendly legalisation through its emergency market intervention mechanism to address price issues in the transportation sector.

Uncommonly warm winter reduces heating demand

So far, this winter has been exceptionally warm, resulting in well below normal heating demand compared to previous seasons over the last 20 years. Based on the 10-year normal, heating demand so far this year is 9.4% below normal, and currently the second lowest of the past 22 years. In turn, this supressed demand caused storage of natural gas and other heating components to reduce at a much slower pace than normal.

The forecast during the next few weeks features cooler weather across much of the continent compared to the unseasonably warm conditions that have been in place most of this winter. Temperatures will be cooler than normal in portions of southern Europe, while northern portions of will have near to a bit above-normal temperature. This will likely equate to below-normal overall heating demand across Europe since most of the major population centres will be in the warmer regions.

Hence, even though temperatures will be a bit cooler than they have been recently in the core areas of Europe, overall temperatures will still be warmer than normal which will continue to result in below normal heating demand. Longer-term, there are no signs of any extremely cold air moving into Europe in the foreseeable future. The lack of cold air is expected to keep heating demand below normal and supress any energy risk into the latter portion of the winter season.

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