The European gas market has changed significantly in recent years due to the pandemic and the war in Ukraine. Although the spot markets have eased, with the THE price currently between EUR 35 and 40 / MWh (as at 18.7), this calm could be deceptive. Gas levels in France are at 68.64% of 125.71TWh, in Italy at 73.53% of 202.52TWh and in Germany at 53.21% of 247.36TWh.
Every day, we observe how market mechanisms and political framework conditions influence each other. This raises a key question: should large consumers stock up on gas at the moment and what do the gas levels mean for security of supply?
Gas storage as a market participant or safety net?
If gas storage facilities act as market participants, they earn money from arbitrage, i.e. buying gas at low prices and selling it at higher prices. However, they hardly fulfill this role at present, as they still have to maintain a minimum fill level in terms of security of supply, which is independent of the market, due to the current regulatory framework. This conflict of objectives becomes particularly clear when you look at the regulatory requirements: Operators have to achieve minimum fill levels even though they are not (allowed to) buy gas themselves, but only provide the infrastructure. The spreads currently to be realized lead to very little demand in ongoing storage tenders and therefore do not fill the storage facilities.
Deceptive calm on the spot market
Although pipeline supplies from Russia have been interrupted, Russian LNG is still flowing to Europe - around 15 to 20 percent. At the same time, US LNG is entering the market. But what happens if the EU bans Russian LNG completely? Or if demand picks up in Asia? Even minor geopolitical tensions, such as the recent Iran crisis, have caused prices to rise to €42/MWh in the short term. The higher proportion of LNG also makes prices more volatile.
Industry in transition
In this area of tension, the industry is trying to make a contribution to the energy transition by structurally replacing natural gas with electricity. But this is easier said than done. Grid connection capacities and regulatory hurdles will determine whether this transition succeeds. At the same time, we need to be prepared for longer periods of extreme prices, such as a long winter and low storage levels. LNG needs around 14 days to be physically available. That is an eternity in a supply crisis.
Conclusion: keep an eye on February and March
The coming months are crucial. If you think about your procurement strategy now, you can protect yourself against possible price peaks. In the past, these price peaks have often occurred towards the end of winter - whenever low storage levels meet a late winter cold spell, everything is set for extreme prices. One thing is clear: we need to resolve the conflicting goals of the market and security of supply. Storage facilities cannot do both at the same time. It is time for an honest debate and clear decisions.
