At the end of last winter’s heating season, it was an unusually cold spell that upended European natural gas markets, with storage levels falling below average and prices firming up as demand shot up.
At the end of this winter’s heating season, it is the unusually mild weather in most of Western Europe for most of the winter that has driven natural gas prices down and left supplies higher than the seasonal average.
The summer gas futures at the Dutch TTF hub have declined by 16 percent so far this year and have been trading lately around the lowest in 10 months. The winter gas futures contract, however, has dropped by just one third of the decline in the summer contract, according to data from ICE Endex compiled by Bloomberg.
So the discount of the Dutch summer natural gas futures to the winter contract widened to the biggest since 2011 as of early March. Typically, such a wide spread would mean that one of the most common European gas trades—buying cheaper gas futures in the summer to sell in the winter—would be the most profitable in eight years.
However, traders are unable to take full advantage of the wide winter-summer spread because several factors have combined this winter season to create a perfect storm in the European natural gas markets. These factors are higher stockpiles than usual, limited available storage capacity as most of it is booked out amid declining overall capacity, and increased liquefied natural gas (LNG) shipments to Europe as Asian LNG spot prices continue to tumble.
First, unlike last year’s winter, this winter has been unusually mild in many parts in Western Europe. This has led to lower natural gas demand and lower withdrawal from storage—a stark contrast compared to the 2018 winter.
The cold spell in Europe at the end of February and early March of 2018 led to record withdrawals in the first quarter of 2018, and storage levels dropped to 18 percent of capacity—well below the five-year range—the European Commission (EC) said in its Q1 Quarterly Report on European gas markets. By the end of the winter season, natural gas stock levels dropped below 10 percent of capacity in countries such as Belgium, France, and the Netherlands, where high gas demand from the UK contributed to strong withdrawals.
Before the 2019 winter season began, the European market was tight amid higher demand in the summer’s heat wave, while natural gas stockpiles were still lower than usual after the winter of 2018, one of the coldest winters in the past decade.
Natural gas prices in the UK surged to the highest for a summer season, with Europe’s natural gas market the most bullish in years, as higher-than-expected summer demand and a tighter market drove natural gas price futures to levels last seen during the winter’s supply crunch.
But the 2019 winter has been quite a different story. The UK, for example, registered its warmest February on record, with daily maximum temperatures the highest on record dating back to 1910, according to the UK’s Met Office.
Due to the warmer winter, natural gas stockpiles across Europe are now higher than the typical levels for this time of the year. What’s left of the storage capacity is nearly “sold out”, according to analysts who spoke to Bloomberg.
“We are going into this summer with full storage, among the highest in years,” Wayne Bryan, a trader and analyst at Alfa Energy in London, told Bloomberg, noting that he wasn’t buying anything at the moment.
In addition, Europe’s total storage capacity has declined by more than 4 percent since 2016, according to data from gas industry trade association Gas Infrastructure Europe, cited by Bloomberg.
As a result, higher-than-usual gas stocks in European storage and almost fully booked storage space have been preventing natural gas traders from profiting from the most profitable price differential between winter and summer gas futures contracts in years.