European Gas Swings as Tepid Demand Counters Weather Risks

European natural gas prices eased following a brief rebound this week, as lackluster demand counters concerns about cold weather later this month.

Benchmark futures dropped as much as 3.6% after fluctuating earlier. Europe is heading into the heating season on relatively safe footing amid high winter stockpiles, with storage facilities more than 96% full.

Fuel shipments from Norway — its top gas supplier — have also risen to the highest level since late August after protracted outages, even though some seasonal works continue to face delays.

For the time being, gas consumption in Europe is historically low, after severe cuts in demand at the peak of last year’s energy crisis. Overall fuel usage in France in September was 26% below the 2019-2021 average, while in the UK that drop was 22%, data published this week by think tank Bruegel show.

Dutch front-month gas, Europe’s benchmark, traded 1.9% lower at €37.72 a megawatt-hour by 11:21 a.m. in Amsterdam. The UK equivalent contract declined 1.5%.

European futures rose Wednesday after some market participants “took advantage of low pricing to secure their positions,” analysts at Alfa Energy Ltd. said in a note. “Nevertheless, the overarching fundamental picture remains bearish.”

Potential Risks

Traders are closely monitoring the winter outlook for clues about future demand. Under a “soft winter scenario” — likely characterized by mild weather and ample fuel supplies — European gas prices could drop even lower, according to Goldman Sachs Group Inc.

However, if the market tightens during the heating season, prices could more than double, reaching levels where it becomes cheaper for some users to switch to oil, which is currently around €105 a megawatt-hour, analysts Samantha Dart and Daniel Moreno said in a note.

Meanwhile, temperatures in northwest Europe are expected to drop below seasonal norms in the second half of October, according to a Bloomberg model using Global Forecast System data. That could boost demand for heating needs and trigger withdrawals from storage sites.

In addition, supply risks are lingering from a labor dispute in Australia that roiled the market in recent months. The country’s liquefied natural gas workers were set to meet Thursday after raising complaints over the terms of a deal to end strikes at Chevron Corp. facilities.

(Bloomberg, October 5, 2023)

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