In recent years, the European natural gas market has undergone significant changes due to the pandemic and the war in Ukraine. Although spot markets have eased—with the THE price currently ranging between 35 and 40 euros per MWh (as of July 18)—this calm could be deceptive. Gas storage levels in France stand at 68,64% out of 125.71TWh, in Italy at 73.53% out of 202.52TWh, and in Germany at 53.21% out of 247.36TWh.
Every day, we observe how market mechanisms and political conditions influence one another. This raises a key question: Should large consumers stock up on gas right now, and what do gas storage levels mean for the security of supply?
Gas storage as a market participant or safety net?
When gas storage facilities operate as market participants, they profit from arbitrage—that is, by buying gas at low prices and selling it at higher prices. However, they currently fulfill this role only to a limited extent, as current regulations still require them to maintain a minimum storage level—for the sake of supply security—that is independent of market conditions. This conflict of interest becomes particularly clear when examining the regulatory requirements: Operators must meet minimum storage levels even though they themselves do not (and are not allowed to) purchase gas, but merely provide the infrastructure. The spreads currently achievable result in very little demand in ongoing storage tenders and thus do not lead to the storage facilities being filled.
A Deceptive Calm in the Spot Market
Although pipeline deliveries from Russia have been interrupted, Russian LNG continues to flow into Europe—accounting for about 15 to 20 percent of the total. At the same time, U.S. LNG is flooding the market. But what would happen if the EU were to completely ban Russian LNG? Or if demand in Asia were to pick up? Even minor geopolitical tensions, such as the recent Iran crisis, have caused prices to spike to €42/MWh in the short term. The higher share of LNG also makes prices more volatile.
Industry in transition
Amid these conflicting pressures, the industry is attempting to contribute to the energy transition by systematically replacing natural gas with electricity. But that’s easier said than done. Grid connection capacity and regulatory hurdles will determine whether this transition succeeds. At the same time, we must prepare for prolonged periods of extreme prices, such as during a long winter or when storage levels are low. It takes about 14 days for LNG to become physically available. In a supply crisis, that’s an eternity.
Conclusion: Keep an eye on February and March
The coming months will be crucial. Those who think about their procurement strategy now can protect themselves against potential price spikes. In the past, these price spikes often occurred toward the end of winter—whenever low storage levels coincide with a late-winter cold snap, the stage is set for extreme prices. One thing is clear: We must resolve the conflict of objectives between the market and security of supply. Storage facilities cannot do both at the same time. It is time for an honest debate and for clear decisions.
