The importance of filling storage

Published at 11:39 6 Aug 2013 by . Last edited 11:17 22 Aug 2019.

The European gas market has been in a period of catch-up after the cold March and April, as it has worked to inject sufficient gas into storage for the next winter. Outside of that demand for gas to go into storage, end user gas demand remains weak with residential and commercial demand now in the middle of its off-season, industry still looking for some source of growth, and gas stubbornly not pricing itself into power – out of merit in part due to that big need for gas to go into storage.

Against the poor demand side, the supply side has helped pitch in some price support with Norwegian gas supplies suffering a fair share of small outages on infrastructure, mixed in with the usual seasonal maintenance. While Dutch production has had a good year, UKCS production continues to decline. LNG imports are still down this year although LNG flows did manage to surprise a little to the upside in the shoulder months between the Asian heating and cooling seasons, with UK LNG imports actually posting a y/y increase in June. We expect LNG imports for the full year to be down some 20% across the main European gas markets. This year's pattern of reductions during the peak periods followed by some more cargoes coming in the shoulder months points to European use of LNG as now being about helping to fill gas storage facilities.

As a result of these balances, UK NBP D+1 prices across Q2 13 were up 14% y/y, while July prices were up 18% y/y. The spreads between the UK NBP and the continental markets such as the Dutch TTF have demonstrated strong seasonality, with the NBP trading at a premium during the peak demand periods and at a discount to the continental hubs during non-peak months. The signals are clear, the UK balances in the peak periods by recourse to continental storage and then helps fill that storage back up as we go through the summer.

Going forward, a key is in the storage levels and we estimate that injection rates into storage need to be at the same rate to get most of the storage facilities in the north-west European market to close to the same level as last year at the start of October. Notable exceptions are Austria and the UK, where seasonal maintenance at Rough will make it hard to get its facilities full at that time. As such, pressure will remain on prices and we do not expect to see NBP prices deviating much from the 65 p/therm level over the coming two months. Even at the July injection rate, a number of countries will have inventory levels down y/y, and as such the risk premium imbedded in the coming winter contracts is not likely to reduce that much over the coming two months. However, as we go forward spreads like the winter 13 – winter 14 spread could certainly narrow if injection rates are maintained at good levels.

The big news in the last month was the RWE victory over Gazprom in its contract arbitration. RWE was able to secure hub-indexation to replace oil-indexation in its gas pricing formula. Given this, we just may be on the verge of the age of gas on gas pricing. While this is undoubtedly a good thing for gas markets, the market power of Gazprom on the supply side means that its approach to marketing its gas will ultimately drive the levels of hub prices. Without a healthy source of competition for the marginal levels of demand, gas prices may still be very sticky to the down-side.

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