European Gas Heads for Weekly Drop as Mild Weather Eases Crisis

(Bloomberg) -- Natural gas prices in Europe headed for a fourth weekly loss, with the energy crisis easing amid unseasonably warm weather that has reduced demand for heating. 

Benchmark futures are set for a 4% drop this week, even as prices fluctuated on Friday. Mild temperatures are likely to continue next week, with much warmer-than-average weather forecast France and Germany, according to Maxar Technologies Inc.

Energy costs have been a key driver of inflation, and unexpectedly low demand is easing the burden on consumers and sparking optimism among European authorities. After record prices last year and fears that governments would have to resort to rationing, the mild winter is a gift that is helping the region keep inventories at healthy levels.

Record-Hot Winter Gives Europe Breathing Room on Energy Crisis

“We are very optimistic, which we weren’t really back in the fall,” Klaus Mueller, president of Germany’s network regulator, said in an interview with public broadcaster ARD, adding that a gas shortage this winter is unlikely. “The more gas we have in storage facilities at the beginning of the year, the less stress and cost we will face in filling them again for next winter.”

European stockpiles are 83% full — above the five-year seasonal norm for this time of year —with some nations even sending gas into storage in recent days. In Germany, the region’s largest economy, that level is almost 91%, according to Gas Infrastructure Europe.

“A bullish scenario is the least probable for this winter, if a prolonged cold spell doesn’t materialize soon enough,” said Giacomo Masato, lead analyst and senior meteorologist at Italy-based energy company Illumia SpA. “We will hit mid-January with healthy storage and half of winter is already gone. So this winter now seems less of a threat to gas markets.” 

Residential, commercial, and industrial gas-users have all been reducing their demand over winter to reduce costs. Even with a cold-snap in the beginning of December, pan-European demand was 11% below the five-year average last month, ICIS data show. 

Dutch front-month futures rose 1.1% to €73.20 per megawatt-hour by 9:55 a.m. in Amsterdam, after slumping in earlier trading. The UK equivalent contract edged higher.

While European gas futures have generally trended downward in recent weeks, risks remain. Prices are still higher than normal and the continent is exposed to any further supply disruptions, with the global markets fundamentally short of gas this year amid lower flows from Russia. Supplies of liquefied natural gas will remain limited, with no new major export projects starting in the near term, and competition with Asia for the fuel could increase.

“The fundamentals haven’t changed,” said Graham Freedman, an analyst at consultancy Wood Mackenzie Ltd. “We still have the rest of the winter to get through and supply risks are still there.” 

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