Why have prices eased despite ongoing geopolitical risks?
Although the situation in the Middle East remains very concerning, in terms of the energy markets, last week reports of gas exports from Israel to Egypt resuming has lent some downward pressure. With no deterioration in the energy flows the gas market in Europe and the UK are focusing on the supply/demand fundamentals. However, a level of risk will still be priced in especially with concerns around contagion within the region.
As of Monday 5th November, European storage sites were 99.6% full, giving comfort there would be ample supply over the winter period. The warm start to winter and the delay in heating demand has kept consumption levels in check. At the same time continued LNG arrivals to the region and high exports from Norway has meant there is ample supply, pressurising prices.
Are we out of the woods this winter with high storage levels?
No not necessarily. Even though storage levels are at record levels, there is still significant uncertainty about the weather and the amount of depletion ahead. At maximum withdrawal levels, storages would be depleted within two-months. Therefore, it really depends on how cold the winter can get. Even if we come out of this winter with gas still left in storage, next summer prices could push higher if there is high injection demand. So essentially whilst the premium maybe coming out of the near term, it could be pushed into the forward curve.
Based on historical withdrawal levels what could storage levels look like?
Looking at the current storage level and historical reductions over the last decade, storage levels are forecasted to fall approximately 50% before the end of winter leaving storages 50% full. Looking at the range, in a very cold winter scenario, inventories are very unlikely to fall below 30% full, and if the winter remains mild, they could end as high as 70% full (figures used are approximates).
As things stand fundamentals are looking stable but as always, the energy markets are not quiet for too long, keep an eye out any news that could drive prices.
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