On the cusp of Europe's winter season, gas storage hits 10-yr low

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FILE PHOTO: A worker walks at the Yara ammonia plant in Porsgrunn

By Nora Buli and Nina Chestney

OSLO/LONDON (Reuters) -European gas storage levels are at their lowest in at least 10 years ahead of the crucial winter heating season, exacerbating the risk of further price spikes from already record-high levels.

In European countries and Britain combined, storage sites are currently around 72% full, compared with 94% full at the same time last year, and 85% full on average over the past 10 years by the end of September, based on the latest Gas Infrastructure Europe data.

Gas storage is used as a buffer at times of high demand and tight supply. The low levels seen now - shortly before the end of the re-stocking phase in Europe's gas market - are a cause for concern, market observers say.

The winter gas season, when prices are typically higher and more gas is withdrawn from storage to meet demand, begins on Oct. 1 and continues until the end of March.

"We're forecasting European inventories to be about 78% of normal from Oct. 1 when we reach the winter season and that loss of inventories is unsettling the market," said Russell Hardy, chief executive of energy trading firm Vitol.

Gas storage was emptied last winter due to strong demand, exacerbated by relatively weak renewables generation and strong underlying power demand, James Huckstepp, manager of EMEA gas analytics at S&P Global Platts, told Reuters.

"Power and gas demand has also been strong in Asia which pulls LNG away from Europe. This has combined with a global supply crunch and limited injections this summer, resulting in record-low stocks as we enter the heating season," he added.

This in turn has seen benchmark gas prices in Britain and at the Dutch TTF hub - the key European gas market place - spike to record highs.

"There is particular alarm in the UK after a number of smaller utility companies were forced into insolvency by higher prices," analysts at Commerzbank said.

Several small UK retail energy companies, caught between promises of bargain prices and the need to cover high purchase costs, have gone bust.

The main bullish factors over the past two months have been Russian supply disruption and global LNG liquefaction issues. Supply from both sources should remain relatively tight over the rest of this year, regardless of any potential startup of the Nord Stream 2 pipeline, S&P Global's Huckstepp said.

Gas flows through the pipeline carrying Russian gas to Europe could start in the fourth quarter, S&P Global expects.

Although Russia's Gazprom has finished construction of the Nord Stream 2 pipeline which a Gazprom-led consortium will use to carry gas under the Baltic Sea to Germany, an energy regulator in Germany still must approve compliance with energy company laws.

(Reporting by Nora Buli in Oslo and Nina Chestney in LondonAdditional reporting by Julia Payne in LondonEditing by Veronica Brown and Matthew Lewis)

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