European gas storage is almost full to the brim – and with the mild weather, coronavirus lockdowns hitting demand and an over-supplied market, levels are not likely to drop soon.
New analysis from natural resources consultancy Wood Mackenzie suggests October may prove critical for the market – and highlights a potential solution to the storage crunch.
At the end of March, Europe had 57 billion cubic metres (bcm) of storage in place, a record for this time of year. The high level of storage further weakens an already oversupplied summer market.
Graham Freedman, principal analyst at Wood Mackenzie, said: “While the oversupply does cause concern for the market, it opens up potential to use Ukraine’s so-far under-utilised storage facilities to park some of this gas until the market improves - either next winter or during following years.”
At the end of October 2019, Europe had a record 103 bcm in storage. Withdrawals over the winter were low, leaving 94 bcm available at the beginning of 2020. Storage utilisation in 1Q 2020 continued to be below average.
The very mild winter, combined with the large oversupply of liquefied natural gas (LNG) and pipeline gas trying to access the market and low prompt prices, affected utilisation. Coronavirus containment measures hit demand across the continent from mid-March, particularly in the industrial and commercial sectors.
Freedman said daily storage withdrawals fell from a peak in early February of over 600 million cubic metres per day (cm/d) to around 360 million cm/d during the third week of the month. Average daily withdrawals for March were 212 million cm/d, approximately 23 million cm/d below average for the month.
He added: “By the end of March, when annual storage contracts finish and a new storage cycle begins, Europe had a record 57 bcm of gas in storage – 13 bcm above the high set in March 2014 and 25 bcm higher than the five-year average of 32 bcm. This is a very different picture to 2018, when there was a record low of 20 bcm in place at the same time of year.
“To get back to the five-year average inventory of 92 bcm by the end of October, Europe will only need to inject 35 bcm into store. In 2018, it needed to inject 71 bcm, and last year required 50 bcm cm in 2019. In an average year, injections total about 60 bcm.
“The injection of 35 bcm during the summer is likely to be completed by early September and will not be sufficient to satisfy all the supply that will be available during this period. As a result, we forecast an additional 13 bcm will be injected taking overall gas in store by the end of October to 105 bcm.”
Given the large global oversupply of LNG and pipeline gas, the injection of 48 bcm of gas into European storage may not be enough to satisfy the demand for capacity this summer, Freedman said.
“One option to resolve this would be to use Ukrainian storage,” he added. “With 32 bcm of capacity, this would represent a significant extra resource for storing gas.
“Like Europe, Ukraine had a very mild winter, so it was left with nearly 15 bcm in stock at the end of March. If it then refills during the summer at the same rate as the historical average it will have around 23 bcm in store by the end of October. This leaves 9 bcm unused for the coming winter, which could be used by European traders if the economics continue to make sense.
“The aggregate cost of using Ukrainian storage, taking into account associated pipeline transportation fees between neighbouring countries, is no higher than €3.16/MWh, giving sufficient incentive to use this capacity.”
While Freedman said it is possible for a total of 57 bcm to be injected into storage this summer, it will be highly dependent on summer-winter price spreads remaining at or above €4/MWh at European hubs, providing enough incentive to use this additional available capacity.
He added: “Should this 57 bcm be injected, that would bring this summer’s injections close to the 60 bcm average injections historically seen in Europe, which will help to support the market during this period of oversupply.
“This would also leave Europe going into next winter with a record 114 bcm available to supply the market. Unless we get an exceptionally cold winter, there could be a large storage overhang to deal with going into 2021, further extending the period of oversupply in the market.”