LONDON, Jan 20 (Reuters) – Europe is on course to end the winter of 2022\/23 with a record amount of gas in storage, putting downward pressure on futures prices for deliveries this spring and summer.<\/p>\n
But even with a record inventory carry over, the region will likely experience higher prices and renewed pressure to conserve gas in the winter of 2023\/24.<\/p>\n
Europe\u2019s storage is designed to smooth out seasonal variations in consumption not to provide a strategic stockpile to protect against an embargo disrupting supplies.<\/p>\n
Combined gas consumption in the European Union and United Kingdom was around 5,203 terawatt-hours (TWh) in 2019, the last full year before the pandemic, according to Eurostat.<\/p>\n
They have enough capacity to store 1,129 TWh, equivalent to about 21% of annual consumption, according to Gas Infrastructure Europe.<\/p>\n
In practice, storage depletion supplies a much smaller share of actual consumption each year, typically around 10%.<\/p>\n
Seasonal storage is designed to absorb excess production during summer, discharging during winter to meet peaking consumption.<\/p>\n
Using inventories to shift supply from summer to winter in this way is more cost-effective than maintaining lots of extra production capacity that would only be used a few months each year.<\/p>\n
Inventories are large enough to cope with the unpredictability of winter heating demand and ensure supply does not run out in the event winter is much colder than average.<\/p>\n
But given the relatively small volume of gas that can be stored, the inventory system cannot provide both seasonal and strategic storage at the same time.<\/p>\n
Storage follows a two-season cycle of summer (with inventories accumulating from roughly April to September) and winter (inventories depleting from roughly October to March).<\/p>\n
Deviations from this are usually reversed within the subsequent season via large changes in prices forcing inventories back to the long-term average within 6-12 months.<\/p>\n
If inventories end the summer unusually high, prices fall to boost consumption, ensure inventories deplete faster and end winter close to average.<\/p>\n
Conversely, if inventories end winter low, prices rise to curb consumption, accelerate inventory accumulation and end summer close to normal.<\/p>\n
Price changes ensure that inventories normalise within a single storage year rather than over multiple storage years.<\/p>\n
Gas conservation policies, high prices and an extended period of unusually warm temperatures between mid-December and mid-January have combined to avert possible gas shortages this winter.<\/p>\n
EU and UK storage is on course to end the winter of 2022\/23 more than 54% full, well above the average of 35% over the previous 12 years (\u201cAggregated gas storage inventory\u201d, GIE, January 20).<\/p>\n
But that means there will be much less unused space to absorb over-production during the summer season of 2023.<\/p>\n
Lack of storage will ensure prices fall to stimulate consumption and discourage production to limit inventory accumulation.<\/p>\n
But the futures market is forward-looking; traders are already anticipating, accelerating and amplifying the price decline.<\/p>\n
Prices have tumbled to limit excess inventories and create more space for gas to be put into storage during summer 2023.<\/p>\n
Futures prices for gas delivered in March 2023 have fallen to less than \u20ac65 per megawatt-hour from \u20ac177 at the start of October and a peak of \u20ac338 in August.<\/p>\n
Pressure on storage space is likely to keep prices low this summer even if they then rise again next winter.<\/p>\n
Given the limitations of the storage system, a record carryover from winter 2022\/23 will lessen but cannot eliminate the need for high prices and conservation in winter 2023\/24.<\/p>\n
Higher inventories provide more energy security than lower ones, but policymakers should avoid implying inventories alone are enough to prevent shortages or price spikes next winter.<\/p>\n","protected":false},"excerpt":{"rendered":"
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