The previously mundane world of gas storage has been grabbing headlines over the past few months, as energy analysts pore over capacity targets, daily injection levels and LNG cargo ship locations to assess Europe’s ability to avoid industry shutdowns and power rationing this winter.

Exceptionally high prices, energy conservation and warmer than normal temperatures since the middle of October have combined to cut consumption and attract large volumes of imported LNG to Europe. This has allowed Europe to far exceed all injection projections and, as of the 6th of December, Europe’s storage was 91.27% full.

This, in turn, has allowed many businesses with Flexible contracts to benefit from tumbling Day Ahead prices this winter, safe in the knowledge that a sustained increase in commodity costs would likely be protected by the UK Government’s Energy Bill Relief Scheme (EBRS). To date, Day Ahead contracts have significantly outperformed the EBRS supported prices and have averaged just £128.5 MWh for Power and 115 p/Therm for Gas through October and November.

In fact, should storage depletion follow central prediction levels, Europe's gas inventories are on course to end the winter at one of the highest levels on record; as long as prices stay high to erode demand and providing that the remaining pipeline deliveries from Russia continue. Attention now switches to Summer 23, when Europe will begin its preparations for the Winter 23 season through gas storage injections. Traditionally, the summer provides a sustained period of reduced heating demand that allows gas storage levels to be replenished at supressed price levels.

However, Summer 23 is looking anything but the norm, as Europe faces the first full summer without Russian flows of gas of 35-60 bcm. This, coupled with increased demand for LNG from China as it moves out of COVID restrictions, could see Europe facing a shortfall of gas required and a sustained peak in prices. Indeed it is those fears that are currently reflected in the UK wholesale market, with limited spread observed between Summer 23 and Winter 23 prices.

Without confirmation of UK Government support beyond March 2023, Flexible business customers with open positions will now be pondering hedging strategies for the summer; with an ongoing focus on key supply and demand metrics this winter. Day Ahead prices have been trending upwards as temperatures have dropped in the last few weeks which will undoubtedly raise more uncertainty on the optimal approach.

Some comfort has been provided through positive news surrounding the resumption of LNG production at Freeport from January, as well as a proposed agreement between the UK and the US for the shipment of 10bcm of LNG over the next year. However, for the foreseeable future, be prepared for more news from Adalta Energy through our monthly Market Updates as Europe continues the slow transition of the energy complex away from reliance on Russian supplies.

Adalta Energy understands that this is an uncertain and extreme time for UK business. If you have any questions on the ongoing energy crisis or require any assistance, then please contact enquiries@adaltaenergy.co.uk or call Ed Butler directly on 07989 431184. Alternatively, if you are an existing Adalta Energy client then please speak directly with your dedicated contact.