European Gas Set for Weekly Gain as Supply Risks Rattle Market

(Bloomberg) -- European natural gas prices are poised for a weekly gain as the market grapples with depleting stockpiles and tighter supplies after the loss of Russian flows via Ukraine.

Benchmark futures traded near €50 a megawatt-hour on Friday, with the contracts on track to end the week about 5% higher. That would be a third consecutive weekly gain, even with thin trading volumes due to the New Year’s holiday.

European gas prices are hovering near a 14-month high, more than two years after the region went through an energy crisis. The halt on New Year’s Day to Russian gas deliveries across Ukraine came as storage facilities deplete at the fastest rate since before the crisis.

The weather is also turning colder, which could spur further withdrawals. The region’s vast underground facilities are now about 72% full compared with 86% at the same time last year. While there’s little risk of an immediate shortfall in Europe, the tight supply picture this winter is set to make stockpiling more challenging ahead of the next heating season.

“Higher demand for gas to be put into storage will keep markets elevated in the coming months,” said Florence Schmit, a European energy strategist at Rabobank.

The continent is now increasingly exposed to market volatility as it becomes even more reliant on global liquefied natural gas to replace the shortfall left by the end of Russian gas flows via Ukraine.

The price moves also coincide with an outage at Norway’s Hammerfest LNG plant, which halted operations until Jan. 9 due to a compressor failure. Any disruptions at global LNG export plants may increase prices swings.

“The global gas balance remains tight with little flexibility to absorb any significant market tightening effects so it is possible to see prices rise substantially in the coming weeks,” said James Waddell, head of European gas and global LNG at Energy Aspects.

Dutch front-month futures, Europe’s gas benchmark, was little changed at €50.20 a megawatt-hour at 8:41 a.m. in Amsterdam.

In the longer term, prices should eventually ease as more supply, including from Russia through Ukraine, should come to the market, according to Citigroup Inc. strategists including Anthony Yuen.

“We are mindful of the unpredictability of the negotiation outcome, particularly when politics, geopolitics and the relationship between Russia and Ukraine are involved, but economic incentives suggest an eventual resumption of supply,” the Citi strategists wrote in a note.