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Europe’s Gas Traders Watch for Sub-Zero Price in Summer Glut

Europe’s Gas Traders Watch for Sub-Zero Price in Summer Glut

May 25, 2023
Some European short-term natural gas prices could briefly dip below zero this summer if sluggish demand doesn’t catch up with a growing supply glut.

Source: Bloomberg

Such an event  — where producers effectively pay someone to take their gas — is looking ever more possible with prices collapsing to pre-crisis levels, according to traders at the annual E-World energy fair in Essen, Germany. 

It’s something that hasn’t happened since October 2006 when UK within-day rates briefly fell below zero after a new supply pipeline opened amid mild weather. Similar forces are at work now, with prices crashing as inventories fill fast, consumption sputters and strong wind and solar output. Markets for countries with limited storage like the UK have a higher chance of hitting zero.   

“Individual regional gas markets in Europe could go negative when you have hours and days with renewable production,” Peder Bjorland, vice president for gas trading and optimization at oil major Equinor ASA, said in an interview. “There is quite a big distance from the price level we see now and to the single-digit and negative prices, and a lot can happen on that route.”

European gas stockpiles are above seasonal norms at about 66% full, and some expect storage sites to be topped as early as August, long before the start of the heating season. At the same time, lower prices are yet to revive industrial demand, with some buyers delaying gas purchases until market rates fall even further. 

Full Stores

“If everything continues like this, we are going to be full fairly early during the summer, by September or October, and then it all depends on how early winter kicks in,” said Gyorgy Vargha, chief executive officer of Swiss trading firm MET International. “In a very short term, for a few days if the storage is full, we could see some single-digit prices potentially because of the physical bottlenecks.”

Dutch front-month gas, Europe’s benchmark, fell to near €26 ($28) per megawatt-hour Thursday. It’s down about 66% this year and trading at a fraction of the €342 peak reached in August. 

In the short-term market, where negative prices are most likely to occur, the Dutch day-ahead contract changed hands at about €28 a megawatt hour. The equivalent UK prices have also declined. 

While rare in gas markets, negative prices are increasingly frequent in electricity trading, and strong wind generation during a low-demand weekend can easily push rates below zero. It’s much more volatile than other commodities because there isn’t yet a solution for storage on an industrial scale. 

Even so, a lot of factors need to align for near-term gas prices to turn negative, and there are ways to avoid a big crash. For instance, more storage can be found via floating liquified natural gas cargoes. Or, as a last resort, traders may utilize the vast storage capacity in Ukraine. 

Prices can still spike, whether from supply outages at LNG plants to the risk of a complete shutoff of Russian pipeline flows. And demand may still pick up from industry. 

“If none of the bullish factors materialize and with no Ukrainian storage and no floating on a grand scale, then for a few days prices may fall below €10 a megawatt-hour,” MET’s Vargha said.