Europe Gas Surges 35% on the Week as Supply Risks Rattle Market

(Bloomberg) -- European natural gas futures soared as traders reassessed supply risks amid signs of global competition for the fuel and a heat wave bearing down on the region. 

The benchmark contract ended the week 35% higher, the most since last August, at the height of Europe’s energy crisis. It’s also the first weekly advance since March.

Friday’s surge is the latest example of extreme volatility this week, after the contract appeared to find a floor around €23. While high inventories and subdued industrial demand have depressed prices in recent months, traders are on edge about the possibility of tightening supplies.

Several outages in Norway, Europe’s biggest supplier, have been extended. In addition, there are concerns that the strong inflows of liquefied natural gas — which have helped the continent recover from the crisis — could fall over the coming months after a period of downward-trending prices.

“The physical concerns about LNG have produced enough of a price uptick that it has stopped out a lot of traders who were shorting this market,” said James Waddell, head of European gas and global LNG at consultant Energy Aspects Ltd. “That’s given an extra boost to the TTF,” he said, referencing the benchmark contract traded in the Netherlands.

Supply concerns coincide with higher temperatures as summer starts to take hold, which may raise cooling needs from Europe to Asia and boost competition for LNG. US shipments of the fuel — vital for Europe’s energy security — are currently more profitable to Asia in July, August and September, according to BloombergNEF.

This weekend, a spell of hotter weather is set to spread across swaths of Europe. The UK Health Security Agency issued an amber alert for parts of the country from Friday, with London expected to reach highs of 27.5C (81.5F) on Saturday. Temperatures in the UK capital and Berlin are expected to be higher than Madrid and Rome on Saturday. 

The heat wave in Northeast Asia over the next couple of weeks will also drive up cooling demand, and there will be more interest in cargoes from price-sensitive buyers in the region, according to Waddell. “We are also anticipating a heavy maintenance schedule for LNG export facilities this summer,” he said.

Benchmark Dutch front-month gas settled 19% higher at €32.05 a megawatt-hour, while the UK equivalent contract advanced 23%.

Updates to Norwegian maintenance are likely also adding to price spikes, said Tom Marzec-Manser, head of gas analytics at ICIS in London. “End-of-week covering is probably also playing a part.”

Still, uncertainty remains as industrial demand for gas in Europe’s largest economies hasn’t shown signs of a meaningful recovery, even with prices down about 90% from their 2022 peaks. 

A slowdown in the wider economy and pivot toward renewable energy has lowered gas demand in Germany, Italy, the Netherlands, France, Spain and the UK by nearly 10% in May from a year earlier, according to S&P Global Commodity Insights.

©2023 Bloomberg L.P.