EU Gas Stores at Record Lows: A Perfect Storm for Winter Price Volatility

The European Union’s gas storage levels are at their lowest in 13 years, sparking concerns about winter price volatility. Energy traders and analysts warn that a perfect storm of factors is brewing, which could lead to higher prices as the cooler months approach.

The main culprit behind the low storage levels is the EU’s failure to meet its target of 80% full by the start of winter. The disruption caused by the US-Israel war on Iran has severely impacted exports of oil and gas from the Gulf region, contributing to depleted gas stores. Last year’s cold winter and this summer’s heatwaves also led to higher-than-usual gas power generation.

The UK is particularly exposed to market volatility, relying heavily on imports of gas via pipeline from Europe or tankers from the US and the Middle East. With domestic gas storage capacity at its lowest, the country may struggle to meet winter demand, leading to increased reliance on global imports. This trend is concerning, given that Norwegian output is set to decline in 2030.

The benchmark gas price has climbed to three-year highs above €68 per megawatt-hour (MWh), with analysts predicting further increases if market traders cannot secure enough shipments of liquefied natural gas. Goldman Sachs estimates that prices would need to move above €100/MWh to attract sufficient imports.

The UK’s declining gas production from the North Sea sector is accelerating at an alarming rate, prompting the government to consider providing direct financial support for domestic gas infrastructure, including upgrading and maintaining storage facilities and pipelines. However, some experts argue that this approach may be too little, too late.

“We need a fundamental shift in how we think about energy policy,” says Greg Molnar, a gas analyst and professor. “Relying on imports and spot markets is not a sustainable solution for the long term.” Instead, he advocates for a more balanced approach that prioritizes domestic production and storage capacity.

Analysts warn that the EU’s gas market prices have remained relatively calm this summer, but this complacency may be misplaced. Bjarne Schieldrop, chief analyst commodities at SEB, notes that “no one expects the strait of Hormuz to be reopened any time soon,” leaving the bloc vulnerable to price shocks.

As the UK and EU prepare for the winter heating season, it’s clear that gas supply concerns are acute. The situation highlights the need for a more diversified energy mix, including increased investment in renewable sources and energy efficiency measures. By prioritizing domestic production and storage capacity, policymakers can mitigate the risks associated with global market fluctuations.

Households and businesses must be prepared for higher prices. The UK’s energy regulator, Ofgem, has already warned that typical gas and electricity bills will rise by 4% from October. This increase may seem small, but it serves as a stark reminder of the vulnerability to global market price rises.

Ultimately, the EU’s gas stores are a symptom of a broader problem – our addiction to imported fossil fuels and reliance on volatile global markets. As policymakers navigate this crisis, they must take bold action to address these underlying issues and secure a more sustainable energy future for all.