A new rally in European natural gas prices has been recorded over the past week due to falling temperatures. According to Bloomberg, natural gas posted gains above 25% – the largest in the past two years – as the market climate shift is driving traders to cover their short positions due to unusually cold weather.
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“Perfect storm” in natural gas
Natural gas futures “broke” the multi-month trend of limited movements in a narrow range, reaching the highest levels since July. This surge signals a significant market shift, as increased heating demand clashes with renewed geopolitical risks. “The climate has changed completely — one could describe it almost as a perfect storm,” said Arne Lohmann Rasmussen, head analyst at Global Risk Management.
Prices still remain far from the record levels recorded during the 2022 energy crisis, however the sharp rise shows how vulnerable the European natural gas market remains to prolonged demand increases and volatility. Fuel storage was initially considered adequate at the beginning of the heating season, but in recent weeks concerns about supply balance in Europe have intensified.
Natural gas stocks are below 52% of their capacity, compared to the five-year seasonal average of approximately 67%. Large outflows from storage facilities have brought to the forefront risks for stock adequacy next summer, as Rasmussen pointed out.
“Geopolitical risks and speculative flows boost the rally”
The rally highlights a deeper structural change. Europe has lost much of the flexibility it once had to absorb supply shocks, resulting in storage remaining one of the few available “cushions” as it sources liquefied natural gas (LNG) from around the world. However, stock building often relies on the fact that summer contracts are cheaper than those for the following winter — a price structure that reversed this week and had caused serious concerns last year as well.
While Europe managed to attract abundant supplies via sea this winter and flows from Norwegian pipelines remained relatively stable, the temperature drop increased fuel demand in recent weeks, which until then had remained limited.
“Geopolitical risks and speculative flows are boosting the rally,” said James Waddell, senior executive at Energy Aspects Ltd. According to him, cold weather in Europe and Asia, low stocks and geopolitical tensions around Iran have increased risk premiums, while traders have been forced to cover their short positions.
A storm in France earlier this week also forced some nuclear facilities to shut down operations, further increasing dependence on natural gas. Today, natural gas on the Amsterdam exchange is up 7.1% at 35.52 euros per megawatt hour.
