European Gas Slumps as Storage Gains, Traders Take Profit

(Bloomberg) -- European natural gas prices plunged the most since April after Germany said its gas stores are filling up faster than planned and some traders took home profits after the rally over the recent weeks. 

Benchmark Dutch front-month futures fell as much as 16%, partly reversing last week’s jump of almost 40%. In Germany, gas stores are filling up fast and are expected to meet an October target of 85% full already next month, Economy Minister Robert Habeck said in a statement on Sunday. 

Monday’s plunge in prices is some relief after a furious rally with futures still trading almost six times higher than a year ago. The region is on the brink of a recession, with inflation at the highest in decades in some countries. Governments are also putting in place measures to ease the burden, setting aside some 280 billion euros ($278 billion) in relief packages. 

Germany to Reach October Gas-Storage Target Already Next Month

While the fundamental picture still looks very bleak, with uncertainty whether the Nord Stream pipeline will resume flows after maintenance later this week being the main concern, Goldman Sachs Group Inc. flagged that recent huge price moves are partly down to very low liquidity. 

“European gas prices have in our view overshot fundamentals fueled by a combination of supply and demand concerns and exceptionally poor liquidity in the market,” Goldman Sachs said in a report late on Friday. “Northwest European gas demand has realized above our forecast, this has been offset by higher-than-expected supply, keeping storage builds in line with our expectations.”

With more gas in storage, European nations are slightly better placed to face a further supply cut as Russia’s Gazprom PJSC starts maintenance on Nord Stream on Wednesday. Lower temperatures seen across Eastern Europe, and parts of the Iberian peninsular next week will also help nations to reserve more gas as less energy is seen to be needed for cooling. 

Engie SA’s EnergyScan unit said on Monday that prices are probably dropping on profit taking. Prices gained for six consecutive weeks through Friday. 

“The closer we get to the total filling of gas stocks -- on 27 August, EU stocks were 79% full -- the more the bullish momentum will be challenged,” the market analysis unit said. 

But, even with full storage sites, Germany risks not being able to go through the winter if Russia halts flows to the region’s largest economy. The Czech Republic, which holds the European Union’s rotating presidency, will call an extraordinary meeting of energy ministers to discuss bloc-wide solutions.

At the same time, demand destruction is gaining pace as the supply crunch is hurting industries across Europe. Fertilizer companies are being especially affected, with more than two-thirds of production capacity halted by soaring gas costs, according to Fertilizers Europe, which represents most of the continent’s producers. 

The crunch has triggered increasing action to reduce consumption, with Europe targeting a 15% cut in gas use this winter. European governments have started to take the drastic step of limiting energy use, such as banning outside lighting for buildings and lowering indoor heating temperatures. Germany’s economy minister proposed a reform in power markets so that prices are no longer coupled to the most expensive supplier.

Meanwhile, pipeline supplies into Europe from Norway have fallen about 20% this month as planned and unplanned outages exacerbate the crunch. Competition for LNG cargoes has also increased amid restricted supplies. The Prelude floating LNG export facility in Australia is preparing to resume LNG production, after operations were temporarily halted by a workers strike, according to people with knowledge of the matter. 

Dutch futures for next month fell 11% to 301 euros per megawatt-hour at 10:23 a.m. in Amsterdam. 

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